A variety of factors is impacting the gold price as the second half of the year begins, and some of these factors will pull harder than others at various times. The current story for gold is being driven by interest rates and inflation, although interest rates are currently upstaging inflation.
In a recent report, the World Gold Council noted that the gold price fell 6.6% in the first half of the year following a pullback in late June that more than offset the gains during the rest of the second quarter. The council also said the gold price was primarily driven by higher interest rates during the first half, especially during the first quarter and in late June.
Upbeat investor sentiment amid the global recovery and other supporting factors also helped drive the gold price. The World Gold Council explained that concerns about higher inflation offset some of the drag brought by interest rates, and the government fiscal and monetary response caused some investors to worry about currency risks and capital preservation. Consumer demand also recovered during the first quarter, although the second quarter brought new lockdowns and second waves of Covid-19.
The World Gold Council warned that rising interest rates could continue to cause headwinds for the gold price, although it expects central banks to be cautious in how fast they taper back asset purchase programs or raise interest rates.
The council also noted that due to the ultra-low interest-rate environment, investors had added more risk to their portfolios in search of returns, which could increase the need to hold gold and similar assets for diversification and downside protection.
Looking Ahead in Gold
Moving into the second half of the year, inflation is going to be a major factor, but it depends on whether it ends up being transitory or secular. Trovio CEO Jon Deane believes it will probably be secular rather than transitory, although inflation won’t be the only factor driving the gold price.
“Many economists will argue that the supply bottlenecks will ease, allowing prices to collapse — something that we have already seen in lumber prices in 2021 — and thus, the spikes in inflation are transitory and not a trend,” Deane said in an interview via email. “However, I think we need to look at the broader, global picture. What is the impact of stimulus on asset prices and individual wealth? Do the astronomical rises in wealth levels — caused by asset appreciation — naturally create more consumer demand? This, coupled with the amount of debt and the associated ability of governments to raise rates into these debt levels, continue to create a toxic environment and potentially lead to secular inflation.”
He added that if the Federal Reserve has gotten it wrong and inflation ends up taking hold rather than being transitory, it will likely be a boon for gold. Deane pointed out that the yellow metal has historically performed well during periods of inflation. He believes a bigger question will be whether it is still considered a strong store of value when comparing its performance to that of historical periods.
“Gold has been used as a defensive inflation hedge for years, and if the CPI continues to rise, I think it would be natural for the market to seek safety in assets such as gold,” Deane said. “I believe the risk is to the upside from here. However, with the U.S. coming out of lockdown and a strengthening USD as the economy reignites, I wouldn’t be surprised to see gold outperform in non-USD currencies for the time being.”
A New Record Gold Price Expected
Deane set the next resistance levels at $1,900 and $2,000 due to the historical resistance at $1,900 and the psychological barrier at $2,000. He sees solid support at around $1,770 and believes it will land around there if there is a dip. Deane believes another record gold price is coming this year.
“We will almost certainly climb back above $2,000, and a break upwards of $2,200 seems very probable, as gold is so uniquely positioned,” he said. “Still, with the COVID-19 delta variant creating some uncertainty around the reopening of the economy in tandem with upward price momentum, if it doesn’t happen this year, it will happen in the next.”
Deane predicts that gold will be well above $2,000 by the end of this year and even higher by the end of next year. However, he admits there is a great deal of economic uncertainty, so it’s difficult to say for sure where the gold price will be at yearend. He does expect a retest of $1,900 or even $2,000 in the coming months.
Gold Versus Bitcoin
Another factor for the gold price in the second half of the year is bitcoin. The two asset classes have been facing off for the position of inflation hedge. Some think Bitcoin is the new gold, but Deane believes bitcoin’s volatility will hold it back from becoming a true safe-haven asset like gold. Meanwhile, the gold price keeps rising amid stock market downturns, which isn’t necessarily true of gold.
He added that continued lackluster performance from cryptocurrencies encourages investors toward less volatile assets that show continued growth, like gold. However, Deane still expects bitcoin to act as a headwind for the yellow metal, either by competing directly as a store of value or as an additional asset to be held in inflationary environments.
“I think investors are considering a number of alternative asset classes in the current environment,” he said. “In the wake of unprecedented stimulus, a number of hard assets have appreciated at extraordinary rates. I think digital assets will continue to gain traction with investors, both for their utility as well as price performance. As adoption continues, I think it is natural for demand to shift. However, gold will continue to be a staple of central banks and institutional investors as part of their portfolio composition as a time-honored defensive asset. I don’t believe Bitcoin solves this function just yet.”
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.