Amid Strong Dollar, Is Gold Worth It?

Using the SPDR Gold Shares (NYSEARCA:GLD), the world’s largest gold-backed exchange traded fund, as the measuring stick, gold is doing its job this year. Sort of.

“Sort of” because GLD is down 7.62% year-to-date, but that’s far better than what clients are enduring with the Bloomberg Aggregate US Bond Index and the S&P 500. Translation: Gold is less bad in 2022. Whether it’s doing its job, well, that’s subjective, but hey, less bad counts for something.

As advisors know, gold’s 2022 ills are easily explained. The Federal Reserve is raising interest rates. Aggressively at that. The result is the dollar is the world’s best-performing major currency in 2022, which is problematic for gold because commodities are denominated in dollars.

Add to that – and this is something many clients, particularly the younger ones – gold has properties of hard currencies. That means it can languish when the dollar is strong because market participants will opt for the less risky asset – the greenback.

Some Good News for Gold

While these are obviously trying times for gold, advisors can tell interested clients that, in addition to the aforementioned out-performance of stocks and bonds, bullion remains in demand by a variety of market participants.

“US investors have added the most capital into gold-backed ETFs, equating to 83.7 metric tons (t) followed by the UK with 47.6t, Germany with 28.2t, France with 9.5t, and Japan with 0.8t,” notes State Street Global Advisors (SSGA). “Geopolitical instability, high inflation, and economic uncertainty continued to support gold across Europe and Asia. Strong demand from those regions where the local currency continues to reach decade lows versus the US dollar reaffirms gold’s potential function as a wealth-preservation vehicle and a ‘currency of last resort’ globally.”

Another interesting point for advisors to bring up with gold-interested clients is that while ETFs, such as GLD, are efficient and preferred avenues to bullion exposure for many investors in the U.S., the real driving forces of physical demand of the yellow metal are bars and coins. Fortunately, demand for those products is robust this year.

“In Q1 and Q2, global demand for bars and coins generated 246t and 245t, respectively. This is slightly below the quarterly 10-year average of 284t and on par with the 5-year average of 254t,” adds SSGA. “Yet the recent weakness is not the result of a strong dollar and pullback from US investors. The US dollar appreciated 6.4% in 2021 while bar and coin purchases from US investors posted a decade high of 130t. This trend continued into the first half of 2022 as the US dollar appreciated 9.4%.8 US investors bought 31t and 29t of gold bars and coins in Q1 and Q2, respectively, which is significantly higher than the quarterly 10-year average of 15t and the 5-year average of 13t.”

Other Reasons to Back Bullion

There’s no denying gold is in the red this year, but it has some potentially favorable historical traits on its side. Notably, the yellow metal starts to gain momentum several months after rate hikes. Second, it’s still a premier recession protection asset class.

“When each recessionary period ended, the US dollar retreated. Yet gold saw continued support as recessionary concerns lingered. In fact, gold saw a bull run in the aftermath of each of the last three recessions,” concludes SSGA. “The COVID-19-led recession ended on April 30, 2020, with the price of gold closing at US$1,687/oz. Gold appreciated to US$1,769/oz by April 2021 and to US$1,897/oz by April 2022. A weakening dollar initially following recent recessions has had a positive impact on the price of gold since investors around the world can buy it at a cheaper price.”

Related: Benefits of Bond ETFs Over Mutual Fund Rivals