It is supposed to act as a safety net when markets are in decline, since the price of gold does not usually move with market prices. For this reason, it can also be considered a risky investment, such as an IRA backed by gold, since history has shown that the price of gold does not always rise, especially when the markets are rising. As a result, gold is often considered a hedge against inflation. Inflation occurs when prices rise and, in the same way, prices rise as the value of the dollar falls. As inflation increases, so does the price of gold.
The outlook for gold could improve early next year as restrictive financial conditions begin to impose on the real economy, aggravating downside risks for both the United States and the global economy. In times of economic uncertainty, such as in times of economic recession, more and more people are resorting to investing in gold because of its enduring value. Powell's speech seemed to be a clear sign of the Federal Reserve's intention to control uncontrolled inflation in the United States. In the US, further boosting the dollar against most of its main rivals and affecting the market's appetite for gold.
The World Gold Council, the market development organization for the gold industry, recently opined that the commodity will face two key obstacles. As a result of the Federal Reserve's tightening of monetary policy by 300 basis points over the past seven months, interest rates on sovereign bonds and the U.S. dollar have risen to multi-year highs, posing an obstacle for gold. The outlook for the price of gold will probably depend on how geopolitical tensions develop and how monetary tightening affects the world economy, among other factors.
As central banks diversify their monetary reserves from the paper currencies they have accumulated to becoming gold, the price of gold tends to rise. When expected or actual yields on bonds, stocks and real estate fall, interest in investing in gold can increase and drive up its price. Another 7.5% of demand is attributed to the technology and industrial uses of gold, where it is used in the manufacture of medical devices such as stents and precision electronics, such as GPS units. The dollar is likely to drive up the price of gold due to increased demand (because you can buy more gold when the dollar is weaker).
Major players in gold mining around the world include China, South Africa, the United States, Australia, Russia and Peru. A recession would favor gold prices, but the sharp rise in interest rates used to deal with inflation has so far limited the rise of the precious metal. Gold is also in demand from exchange-traded funds that own the metal and issue stocks that investors can buy and sell. Rate hikes are generally negative for gold because when rates are higher, interest-bearing investment products are more profitable than the precious metal.
Gold can be used as a hedge to protect against economic events such as currency devaluation or inflation.