Gold has held up well against a strong dollar and rising bond yields
OWe are almost halfway through 2022, and so far gold has been the big winner after oil, coal and other commodities. The yellow metal has managed to remain positive year-to-date, skirting pressure from soaring yields and a strong US dollar. Meanwhile, nearly every other asset class — from large and small cap stocks to bonds, from real estate investment trusts (REITs) to cryptocurrencies — fell into correction or bear market territory.
I think this shows that gold has retained its perceived role as a store of value through decades of high inflation and economic and geopolitical uncertainty. As I often say, investing in gold won’t make you a billionaire, but it could help stabilize your portfolio when everything else is crashing.
Dollar at 20-year highs
I’m very impressed that gold has stayed afloat even as the US dollar strengthened to 20-year highs against a basket of other major currencies. Since the price of gold is in dollars, the two assets have historically shared an inverse relationship, with one falling when the other rises, and vice versa. At the start of the pandemic, the dollar soared as investors sought a safe haven, putting pressure on gold. The value of the dollar is now very high due to rising interest rates, and yet the yellow metal has continued to trade above $1,800 an ounce.
It is for this and other reasons that I agree with Newmont CEO Tom Palmer who said last week that the floor price of gold has likely risen from previous lows in around $1,200 to between $1,500 and $1,600 currently.
While I’m on this topic, a stronger dollar is mixed news. On the one hand, it can contribute to limiting the effects of inflation by offsetting the price of imports. On the other hand, it makes US exports more expensive for foreign buyers. As a result, we are likely to see weaker earnings in the fourth quarter for companies with international exposure. Earlier this month, Microsoft joined Coca-Cola, Procter & Gamble and a host of other US multinationals in cutting guidance for the rest of the year due to a stronger greenback.
Will S&P 500 companies increase their dividends to compete with Treasury yields?
As I mentioned earlier, government bonds have sold off steadily this year, pushing yields to multi-year highs. (Bond yields rise when prices fall.) The two-year yield was trading up 3.45% last week, a substantial increase from 0.78% at the start of the year.
This may attract investors looking for yield, but I urge them to keep in mind that inflation is running at an annual rate of 8.6%. This means that they are effectively paying the government for the privilege of holding its debt.
At the same time, dividend investors may find it difficult to pick stocks that are yielding at a competitive rate. As of this month, the S&P 500 has a dividend yield of just 1.68%, up slightly from the start of 2022 but down from June 2020, when it was closer to 2.0%. .
It’s well known that gold earns no income, but with stocks and bonds at a disadvantage, the metal might be a better bet to potentially stay ahead of inflation right now.
Originally published by US Global Investors on June 21, 2022.
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The S&P 500 is a stock market index that tracks the performance of the stocks of 500 major publicly traded companies in the United States. The Nasdaq-100 is a stock market index composed of 102 equity securities issued by 101 of the largest non-financial companies listed on the Nasdaq stock exchange. It is a modified capitalization-weighted index. The Russell 2000 Index is a US equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small cap index. The MSCI US REIT Index is a float-adjusted market capitalization-weighted index that is comprised of equity real estate investment trusts (REITs). The MSCI Emerging Markets Index is a selection of stocks designed to track the financial performance of key companies in fast-growing countries. The S&P US Treasury Bill Index is a broad, comprehensive, market value-weighted index that seeks to measure the performance of the US Treasury bill market. The S&P US High Yield Corporate Bond Index is designed to track the performance of US dollar-denominated high yield corporate bonds issued by companies whose risk country uses the official currencies of the G-10, excluding member countries of the United Nations for the East. European Group (EEG). The Bloomberg Commodity Index is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited.
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