Understanding the current gold market

Gold is in high demand because it has been used as a safe place to keep money for hundreds of years. But before people think about investing in precious metals, they should know what is driving this demand and what gold and silver can and can't do.

Right now, the price of gold is near a record high. A report from the World Gold Council shows that demand for the asset went up by 12% from the first half of 2021 to the first half of 2022. One estimate says that demand grew by 34% just in the first quarter. This estimate is the highest increase in quarterly demand for gold since 2018.

Goldman Sachs raised its prediction that the price of an ounce of gold will reach $2,500 by the end of the year. This is because gold is in high demand around the world and there isn't much of it. The World Gold Council thinks that gold could be worth more than $3,000 in a few years.

Why Do People Want Gold?

Several things have come together to almost make the perfect storm for gold.

Inflation is at its highest level in 40 years. Conflicts in eastern Europe, messed-up supply chains, and China's strict response to COVID-19 continue to put a lot of pressure on prices. Gold has long been used as a way to protect against inflation. The value of the dollar goes down when inflation goes up. Gold's value stays the same, so it costs more per ounce to buy. So, the investor can keep their whole amount of money.

Aggressive Interest Rate Hikes: Since rising prices hurt every American, the Federal Reserve has made taming inflation its top priority. To do this, they started a series of interest rate hikes in March that kept getting bigger. As long as inflation stayed at record highs, the increases went up quickly and got steeper. In June and July, the Fed raised rates by 0.75 points, which hadn't happened since 1994. This was one of the most severe tightening cycles in the last 20 years.

The flow of "free money" that helped keep stock prices high has been cut off. As a result, there is some volatility in the markets. Some traders are now looking for the real value and stability of gold.

People think that when interest rates go up, the price of gold goes down because investments with a higher return become more appealing. But there isn't much proof that increases in the federal funds rate always make gold less valuable. A study of the huge bull market in gold that happened in the 1970s showed that the price of gold reached its all-time high during a time when interest rates were high and going up quickly.

The Federal Reserve wants to achieve a "soft landing," which means shrinking the economy just enough to stop inflation without causing a recession. The Fed is hopeful, but the big banks are not. Their analysts think that there is a one-in-three chance that a recession will happen. Gold's value has always gone up during a recession. When the S&P 500 Index fell 37% between December 1, 2007 and May 30, 2009, the price of gold increased by 50%.

Goldman Sachs thinks that in the second half of 2022, the demand for gold from central banks will reach a level that has never been seen before. Globally, there are strong geopolitical and diversification reasons for banks to move their reserves into gold. As the US dollar loses its place as the most important currency and as sanctions make foreign reserves more vulnerable, central banks are looking to gold to provide stability and security.

Some other portfolio diversifiers are also losing their value. One of them is the area of digital currencies. Once called "gold 2.0," it is now very volatile and is getting more and more pressure from regulators. Higher inflation is also a problem for government bonds, which can affect their yields.

Putting Together A Gold Portfolio

With the price of gold expected to go up, it could be used to make money, but it is mostly used to keep value. Every investor should look into their own situation to see if holding gold is a good idea. If so, you can put your money into precious metals in a number of ways.

Actual gold In comparison to Paper Gold

You can buy real gold, like bars and coins, or "paper" gold, like gold ETFs or shares of a company that mines gold. Every investment has both good and bad things about it.

Investors can literally hold gold in their hands as an asset. This means that the owners have full control over their investment. It can protect your ability to buy things and is a portable asset that lets you do private business and pass on wealth as an inheritance. One problem with buying physical precious metals is that they cost money to store and insure.

Another thing to think about when you own physical gold is how to sell it. If your precious metals dealer doesn't have a buyback programme, you'll have to find someone else to buy it from you. There are gold exchanges all over the world, which is a good thing.

Investors can easily buy and sell "paper" gold in a brokerage account, so it is a very liquid asset. They can also bring in money, not just hold their value. But they also have some bad things about them. You are putting yourself at risk by investing in a volatile market. Management fees must be taken into account.

Gold securities may be backed by real gold, but you can't trade them for the real thing. So, they don't protect you from market and fiat currency volatility as well as physical gold.

Another worry is that there is much more gold on paper than there is real gold. There is between $200 trillion and $300 trillion worth of gold on paper, but only $11 trillion worth of real gold. There could be a paper gold crisis in the near future.

In these uncertain times, central banks, institutional investors, and private investors are all looking to physical gold as a way to keep the value of their assets up. The demand for gold is rising to new heights because of a number of interconnected factors that feed off each other. There are no signs that these pressures will go away soon. Because of this, people are talking about precious metals again when they talk about investing. People who want to protect their retirement savings might want to learn more about gold and how it might affect their portfolio.