Gold Price Remains Generally Stable Despite a Lack of Investor Interest

Anyone who’s been trying to predict gold’s price movement this year has had their work cut out for them, but that hasn’t kept anyone from trying. It’s clear that we are in an unprecedented market that has left most investors with too many questions when it comes to managing a portfolio in a recession.

2022 as an Unusual Year for Gold So Far

While no market environment offers a cookie-cutter display of what to do when certain things happen, this year has been particularly unwieldy. Essentially, a good course of action has been to do the opposite of what the common market indicators would tell you to do.

For example, lower stocks usually mean higher gold prices, but not this year. It seems investors just can’t get behind any investment. Even central banks aren’t particularly interested in gold now, although they usually buy the metal during periods of hyperinflation as a hedge to protect their nation’s fiat currency.

However, in the case of the U.S., it’s important to note that nearly 78% of its foreign reserves were held in gold as of February, making it the biggest holder of gold among the world’s central banks. As a result, the Federal Reserve may be disinclined to buy gold despite the troubling macroeconomic and geopolitical picture right now.

Investors Aren’t Interested in Gold

The big problem for gold bugs right now is that investors just aren’t all that interested in gold. The World Gold Council reported that the yellow metal’s short-term momentum remained weak last month amid the stock market’s bidirectional volatility.

The gold price declined by about 4% in May, shaving off about half of the year-to-date rise it had recorded through the end of April. The World Gold Council cited two reasons for gold’s declining price last month.

The first was weaker momentum due to outflows of 53 tons or about $3.1 billion from gold exchange-traded funds and the lowest level in net long positioning on COMEX futures in a year. According to the council, absent buyers and an antipathy toward bonds drove that low long positioning in May despite the possibility that inflation could be peaking.

The other reason for the lower gold price was reduced risk and uncertainty as illustrated by the decline in implied 10-year expected inflation breakeven rates. Additionally, stock prices rallied into the end of the month. However, despite that rally, the S&P 500 is still down by about 14% year to date with very little change between the end of May and the end of the first week of June.

On the other hand, gold should have benefited from the stock market’s volatility, which reached levels not seen since the pandemic started. Most equity markets have been in correction or even bear market territory at some point this year. Bond yields and the U.S. dollar were also down in May, which should have driven gains in the gold price.

Despite the overall weakness in the gold price, there was a sign that individual investors are buying the yellow metal. Sales of easily-stored gold coins remain robust year to date. U.S. coin sales are on track this year to reach their highest level since 1999.

Where Will Gold Go Next?

Gold’s current resistance level appears to be at around $1,870 an ounce, where it has bounced off at least twice in the last 30 days. On the other end, the gold price appears stuck above $1,810 an ounce.

According to the World Gold Council, history suggests gold will end the second quarter in the green, but given the unprecedented market environment we’re in, I would say it’s hardly a sure thing.

Most major stock indices are down by more than 10% year to date with equity volatility at multi-year highs and subdued gold volatility. The World Gold Council noted that gold is a useful tail hedge but also works well during long-lasting pullbacks in the stock market.

It looked at the S&P 500’s 10 worst quarterly returns and how gold performed during those quarters. The yellow metal recorded positive returns in nine of the quarters with an average return of 5.4% against the S&P’s average return of -20.7%.

The index’s current performance puts it on track to be among the 20 worst quarters, but gold is down 5% for the second quarter. Due to the unprecedented state of the current market, it’s worth reviewing the only quarter of the S&P 500’s 10 worst quarters in which gold declined to see what happened.

Remembering History: Q4 of 2008

The quarter in question was the fourth quarter of 2008, and gold was down by 1.7%, while the S&P was off by 25.6%. We actually see some similarities between then and now, with government stimulus being the big one.

In October 2008, Congress passed the bailout bill to support U.S. banks, and the Labor Department reported that the economy had shed 159,000 jobs in September. The Fed granted even more assistance to banks by lending $540 billion to money market funds amid soaring redemptions. The Fed cut the federal funds rate to 1%.

In November, the Labor Department reported that the economy had shed another 240,000 jobs in October. The bailout of AIG grew to $150 billion, and the Bush administration started using part of the $700 billion bailouts to purchase preferred stocks in the nation’s big banks. The Big Three automakers requested bailouts.

In December, the Fed slashed the federal funds rate to 0%, the lowest level ever. Throughout all three months, the Dow Jones Industrial Average was plummeting, eventually ending the year down nearly 34% for the year.

This brief history lesson reveals a period of multiple government bailouts for multiple industries. Surprisingly, the dollar was strong in the second half of 2008, driven by the flight to safety into U.S. Treasuries and the reversal of carry trades amid the crisis. Typically, when the dollar is strong, gold is weak, and that negative correlation certainly held up in late 2008.

Today, the dollar remains strong, although gold is holding up due to the mix of other factors in the market. However, given that we got to the current environment following a series of government bailouts for industries and individuals alike, we can’t rule out the possibility of a negative return for gold in the current quarter. Nonetheless, this doesn’t necessarily mean it’s a bad time to hold gold.

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Looking Ahead

The World Gold Council suggested that if stocks remain weak, gold could rally. It also offered reassurance for investors concerned about the yellow metal tumbling in the event of an equity rally.

Looking over the last several weeks, the organization found that in the few times the stock market has rallied, gold has also rallied most of the time. The World Gold Council has also found that gold typically maintains positive performance during most longer-term stock rallies.

For example, it found that in the quarter following each of the S&P 500’s 10 worst quarterly performances, equities rallied an average of 8.7%, while gold rose by an average of 2.5%. Even if gold has a negative second quarter, it’s important to look at the long term when gauging any investment. Given the uproar seen in the markets and economy today, it may be wise to hold gold.

Greenlight Capital’s David Einhorn touted gold in his presentation at the Sohn Investment Conference on Thursday, highlighting the nation’s high debt levels and the lack of trust other nations now have in the U.S. since it weaponized the dollar. Einhorn believes it’s time to hold gold, and it seems likely that a growing number of long-term investors will be inclined to agree.

Where do you think the gold price will go in the next month? Share your thoughts in the comment section below.