After a rally for most of the first quarter of 2022, gold prices have taken a hit in July. When other markets seem to be making a rebound, gold seems to be doing the opposite. While this may surprise new investors, anyone who has been in the market for a while knows that this scenario is pretty normal.
If you zoom out on the XAUUSD chart over ten years, you will notice that gold tends to have an inverse relationship with the equity markets. When equities are going up, gold tends to underperform. The reverse also holds.
What is the reason behind the gold-equities inverse relationship?
For millennia, human beings have not only used gold as a means of exchange but also as a way to store value. Gold’s success as a store of value has seen it being adopted as a safe haven asset in times of market uncertainty. Therefore, when investors feel like there is a lot of uncertainty in the economy, they turn to gold.
Conversely, when investors expect the economy to do well and equities to go up, they abandon gold for equities. The result is that gold tends to underperform at such times.
The current scenario
For most of H1 of 2022, there was a lot of uncertainty around the world economy. The war in Ukraine created an abrupt disruption to global supply chains, affecting the potential revenues of most top corporations. At the same time, the Federal Reserve and many other Central Banks globally took a more hawkish stand on interest rates. This was to tackle inflation caused by the war in Ukraine and years of loose monetary policy.
All these factors made the economic outlook deeply uncertain throughout H1 of 2022. The result was a drop in equity prices and a surge in the price of gold. It was an indicator that investors were running to safety.
However, the mood is changing in H2 of 2022. The war in Ukraine has been raging for months, and the markets seem to have priced it in. At the same time, after months of raising interest rates, the markets are pricing in both the recent rate hikes and the potential ones that could come in the year. With the worst priced in,investors are abandoning safe haven assets like gold in search of entry opportunities in stocks ahead of another bull cycle in the future.
Is it worth investing in gold now?
If the equity markets continue to rebound and optimism in the economy rises, then gold may not be the best asset to buy and hold right now. That’s because it could enter a phase of sluggish performance that could last for years.
That said, gold prices fluctuate every day, just like all other assets. As such, gold comes off as a perfect asset to consider for a person looking to capitalize on daily market volatility.
However, it is essential to note that, like every other asset, trading gold comes with risks. The market can go against you anytime, and if your risk management is weak, you can lose a lot of your capital. That’s why you need to learn different market strategies, get varied trading tools, and learn how to apply them.
For a newbie trader who doesn’t have the time or the urge to go through the learning curve, you can opt for copy trading. Copy trading features like those provided by NAGA help you copy experienced traders’ trading moves and profit from them. It is one of the best ways to profit while minimizing risks when trading XAUUSD.
Gold tends to do well in times of economic uncertainty and underperform when the economy is doing well. That’s because it is usually considered a safe haven asset for uncertain times. However, one can always day trade gold regardless of the prevailing market conditions.