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Why gold has been losing its luster

For generations of investors, gold is often viewed as a safe haven from global uncertainty and market turbulence. Gold, along with other precious metals, is seen as a constant, tangible asset that will always have worth. Economies, financial systems and even entire countries have collapsed, but for centuries, the yellow metal has proven its ability to store wealth.

Gold is a global commodity, and its price is subject to the forces of global supply and demand. Earlier this year, growing concerns of inflation, the decline in the stock market and the future health of the U.S. and global economies sent investors piling into gold. The sudden demand and influx of global cash sent gold prices soaring. On March 8, the price of gold reached an all-time high of $2,078.80 per ounce.

But since its March 8 record high, the price of gold has steadily declined. Currently, the price of gold is $1,681.40/oz. This is 19.1% below its record high. Year-to-date, gold has fallen 8.1%.

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But why has the price of gold declined so suddenly and sharply? Many investor concerns are still unresolved. The U.S. stock market remains in a near 10-month sell-off. Recessionary clouds still hang over both the U.S and global economies. If gold is truly a safe haven, one would expect investor demand to drive prices higher. Instead, prices are declining. So, what is going on?

The answer lies with interest rates. Gold prices are extremely sensitive to interest rates. As interest rates rise, gold prices tend to decline. You see, apart from price appreciation determined in the open market, gold bears no dividend or interest payments. Thus, it must compete with interest bearing investments, such as bonds, for investor funds. As interest rates rise, investors typically shed non-yielding assets such as gold in search of higher yields in other types of investments.

To help get inflation under control, the Federal Reserve has been steadily raising the benchmark fed funds rate. The fed funds rate influences interest rates on many forms of consumer debt as well as interest-bearing investments. Since March, the fed funds rate has been raised from near-0% to 3.25%. This has been the most aggressive pace of interest rate hikes since 1980. In the upcoming months, the Federal Reserve is expected to further raise the fed funds rate to around 4.25%-4.5%. This action by the Federal Reserve has sent bond yields soaring.

In early March, the yield on a one-year U.S. Treasury bill was just 0.85%. Today, that yield is 3.88%. Likewise, in March, the yield on a two-year U.S. Treasury note was 1.28%. Today, the yield is 4.12%. Thus, investors can capture risk-free higher yields that are backed by the full faith and credit of the U.S. government. Yields on other safe haven investments, such as savings accounts and certificates of deposit, have also risen higher in the past six months.

Inflation is expected to remain historically high for most, if not all, of 2023. This means the Federal Reserve will likely be forced to keep interest rates higher for longer to keep that inflation in check. And as long as interest rates remain high, gold may continue to lose its luster among investors seeking higher returns.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.

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