Posted on October 15th, 2022

The gold market climbed above the $2,000 an ounce level in March for the first time since August 2020, in response to Russia’s invasion of Ukraine. Geopolitical uncertainty increased the precious metal’s attractiveness for investors seeking a safe haven for their money.

Prices have since retreated, declining by around 9% year-to-date (YTD). The gold market dropped to a one-year low in September and has since struggled to regain ground above the $1,700 an ounce level.

Gold retreats from strongest rally since 2020 peak

The gold price underperformed analysts’ projections for much of 2021, as expectations of multiple interest rate hikes offset concerns about the economic recovery from the Covid-19 pandemic and high inflation.

The gold market climbed above the $2,000 an ounce level in March for the first time since August 2020, in response to Russia’s invasion of Ukraine. Geopolitical uncertainty increased the precious metal’s attractiveness for investors seeking a safe haven for their money. Prices have since retreated, declining by around 9% year-to-date (YTD). The gold market dropped to a one-year low in September and has since struggled to regain ground above the $1,700 an ounce level.

What is the outlook for the market? Is gold a good investment in 2022, given these opposing price drivers?

In this article, we look at the key drivers for the market and some analysts’ views for the potential future of gold prices.

Gold retreats from strongest rally since 2020 peak

The gold price underperformed analysts’ projections for much of 2021, as expectations of multiple interest rate hikes offset concerns about the economic recovery from the Covid-19 pandemic and high inflation.

Gold 5-year price chart

Investing in gold is typically considered to be a hedge against inflation, as gold retains its value while the buying power of fiat currencies erodes. But it becomes less attractive when interest rates rise, as investors do not receive interest or dividend payments for holding gold.

The gold market has come under pressure as central banks such as the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) have lifted interest rates aggressively in 2022, with more increases expected heading into 2023.

The war in Ukraine initially drove up demand for gold, with the price climbing from $1,800 an ounce at the start of this year to $2,043.30 on 8 March – its highest level since it set a record high above $2,070 per ounce in August 2020. Falling global equity and bond market prices added to gold’s lustre for investors looking for a way to preserve their capital during increased turbulence on the financial markets.

Inflows into gold exchange-traded funds (ETFs) totalled 269 tonnes, equivalent to $17bn during the first quarter of 2022 – the highest quarterly total since the third quarter of 2020. First-quarter US Mint sales of gold coins hit their highest level since 1999, according to data from the World Gold Council.

But flows reversed outward during the second quarter, with net outflows totalling 39 tonnes, equivalent to $2bn. The gold price retreated towards the $1,800 mark in the second quarter, and has shed further value in the third quarter, sliding below $1,800 in early July to 1,703.60 mid-month – its lowest level since March 2021.

The precious metal moved up to $1,815.50 an ounce on 12 August, but it was unable to hold above $1,800, trading down to $1,712.60 on 7 September.

In early October it fell below the $1,700 mark and as of 14 October 2022, gold was trading at $1,652.40/oz.

Gold ETFs saw 51 tonnes of outflows in August, amounting to $2.9bn – the fourth consecutive month of outflows, according to the World Gold Council, which noted:

Strength in the US dollar has constrained the gold market, with the US Dollar Index (DXY) trading at 20-year highs since May.

The Fed raised its benchmark interest rate by 0.50bps on 5 May to 0.75%–1.00%, following a 25bp increase in March. It went on to raise the rate by 75bps on 16 June – its biggest single hike since 1994 – and by another 75bps on 27 July and 21 September. This lifted the rate to a 3.00%–3.25% range – its highest level in over a decade.

Is gold a good investment in this environment? Let’s look at some of the main uses for gold and the reasons investors might tend to include the precious metal in their portfolios.

What are the main use cases for gold?

Gold is predominantly used in jewellery and as an investment vehicle. Global gold demand totalled 4,021 tonnes in 2021, jumping by 50% during the fourth quarter, according to the World Gold Council.

Jewellery fabrication accounted for 2,220.95 tonnes, and gold bars and coins 1,180.37 tonnes. Central banks and other financial institutions bought 463.07 tonnes. Technology applications, such as electroplating in electronics devices, accounted for 330.16 tonnes.

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