Rising inflation and geopolitical events have turned the global economy upside down. Inflation is burning pockets; the stock market faces turbulence, and gold prices are declining despite being a safe-haven asset. In times of market volatility, investors turn towards safe and traditional assets like gold, but the demand seems to have taken a toll this time. Domestic gold prices have fallen 7% to Rs 50,450/10 grams from the April peak of Rs 54,380/10 grams.
Gold is considered an inflation hedge that moves against the stock market. Financial advisors recommend allocating some capital to gold to cushion investors’ portfolios. However, the yellow metal has declined to rise despite a fall in real interest rates.
Should Investors Be Worried?
The reason behind gold’s falling prices is the US dollar and US bond yields. The dollar is becoming stronger, and US treasury yields rise as Fed Chairman Jerome Powell announced further rate hikes. This has made the investors nervous, and they are now betting heavily on the US dollar, making it stronger day by day. Gold is less attractive to buyers when the dollar gets stronger than other currencies.
What Lies Ahead?
Gold prices will only go up when the dollar value reduces, inflation eases, and the Russia-Ukraine war finally ends. Months long war in Europe has caused supply chain issues and currency volatility. Buying gold will be easier for people now, but rising inflation will restrict buying. Until then, diversify your portfolio and keep asset allocation in gold to 10-15% of the total portfolio value.