The global economy is currently unbalanced, creating a situation that financial professionals refer to as a ‘flight to safety’. It is a term used by those who purchase extremely secure investments such as gold. Gold as a commodity has declined 5.5% since the beginning of 2022, dropping precipitously since March 2022.
Investors Turning Their Back on Gold?
Investors are concerned that the most recent data—the increase in US consumer inflation to 9.1% in June, for instance—could encourage the Fed to accelerate the raising of interest rates further to reduce consumer and producer prices. This development increased government bond yields and accelerated the rise of the dollar. Due to the ineffectiveness of gold as an inflation hedge, investors are hesitant about keeping their gold. Since then, investors reduced their bets on the rising prices of gold, indicating a greater conviction that the Fed will take any action to control inflation.
The Alchemy Behind Falling Prices of Precious Metals
The prices of metals with extensive use, such as copper, increase when the global economy booms because they are used to build and manufacture things, while gold declines since it is often used as a safe haven, and one does not need a haven when things are going well. On the contrary, when the economy struggles, individuals tend to resort to gold as a secure investment. The oddity now is that the prices of most metals are decreasing along with those of copper and gold. The major causes for this situation are the dollar strength, US inflation, and a slowdown in the Chinese economy.
The Lethal Combination of a Strong Dollar and Rising Interest Rates
Most commodities, including oil and gold, are priced in dollars. Hence, a strong greenback tends to drive those prices down. In other words, if a person outside the US purchases dollars to buy the metals required, the prices of the metals also increase. Consumer inflation in the US increased to 9.1% in June, which could encourage the Fed to raise interest rates more quickly to reduce the costs for consumers and producers. Borrowing becomes more expensive when interest rates increase, and many metal traders use borrowed funds to execute their trade.
China Pushing Metal Prices
China, the second-largest economy in the world, is one of the largest buyers of copper, according to GlobalData. If China’s economy is affected, the copper market would eventually slow down and copper prices would decrease as a result of the interruption in demand. China purchases all metals, not only copper. Consequently, if China’s economy slows, so does the demand for all the metals.
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