Inflation in the United States reached 9.1% in June, and the United States recorded negative gross domestic product (GDP) growth for the second consecutive quarter. Fears of recession and rising prices have drawn investors’ attention to safe havens like gold and real estate. Historically, gold has outperformed when something goes terribly wrong. So why is it Barrick Gold (TSX:ABX)(NYSE:GOLD) down 40% from its March high?
Why Is Gold Falling Despite Rising Inflation?
Gold is considered a hedge against inflation. But it has failed to play that role in many crises due to the wider adoption of fiat money which allows governments to print money without any gold backing. Gold is a non-income generating asset that pays when its price fluctuates.
The price of gold is inversely proportional to the US dollar. If the dollar strengthens, the price of gold falls, and vice versa. This inverse relationship is the result of the Bretton Woods Agreement of 1944, under which the developed countries of the world agreed to peg the exchange rate of all currencies to the US dollar instead of gold. Even though this agreement ended in the 1970s, the dollar had become the dominant reserve currency in the world, as most currencies were exchanged against the dollar. Today, around 40% of global debt is denominated in US dollars.
The currencies of some oil-producing countries were stronger than the US dollar. But the U.S. dollar strengthened against them after shale gas exploration in 2016 reduced America’s dependence on oil and gas imports. The strengthening dollar has made loans denominated in US dollars more expensive. In 2016, Russia and China called for a single global currency not backed by any nation, but to no avail.
US dollar at 20-year high in 2022
In 2022, the United States became the world’s largest exporter of liquefied natural gas (LNG), particularly to Europe, weakening the euro against the dollar. European debt denominated in US dollars is increasing as Europe imports oil and gas from the United States at a higher rate.
On top of that, the US Fed’s interest rate hike is reducing the supply of dollars. The dollar is at its highest level in 20 years. Higher interest rates on the dollar have made it an attractive investment relative to non-producing gold.
Consequently, the price of gold continues to fall, while the US dollar continues to strengthen. The US dollar index has jumped 10.4% since the start of the year, which is quite high for an index that moves little. Is this the peak of the US dollar?
It’s hard to say, because the strength of the US dollar depends on the economic development of its country. The United States is better off than Europe and China, which are suffering from energy crises and COVID-related lockdowns respectively.
Should you buy Barrick Gold shares?
The strengthening dollar would fade if the US economy fell into a deep recession, and that is when the price of gold would rise. Many analysts and economists compare the current scenario with the recession of the 1970s. Gold prices jumped more than 600% between 1976 and 1980, while the US dollar weakened when the Fed raised rates interest rate of up to 20% to fight inflation of 13.5%. A similar inverse dynamic in the price of the dollar and gold was seen during the crisis of 2008-09 when the US dollar weakened.
This shows that gold always pays off when a crisis hits and the US dollar and stock market crash. Barrick Gold stock jumped 82% in two months (March 15 to May 15, 2020) after the pandemic crash. The stock traded around its high until November 2020, when vaccine news pulled the stock market out of the pandemic decline.
Barrick Gold shares move in tandem with the price of gold. Unlike physical gold, which does not generate income, Barrick Gold stock offers you an annual dividend yield of 2.62%. The company also pays a special performance dividend if its net cash increases.
Now is the time to buy shares of Barrick Gold as insurance against a deep recession. When the stock jumps 80-100%, you can sell it and protect your returns, as the stock will fall when the dollar strengthens with the economy.
Inflation in the United States reached 9.1% in June, and the United States recorded negative gross domestic product (GDP) growth for the second consecutive quarter. Fears of recession and rising prices have drawn investors’ attention to safe havens like gold and real estate. Historically, gold has outperformed when something goes terribly wrong. So why is it Barrick Gold (TSX:ABX)(NYSE:GOLD) down 40% from its March high?
Why Is Gold Falling Despite Rising Inflation?
Gold is considered a hedge against inflation. But it has failed to play that role in many crises due to the wider adoption of fiat money which allows governments to print money without any gold backing. Gold is a non-income generating asset that pays when its price fluctuates.
The price of gold is inversely proportional to the US dollar. If the dollar strengthens, the price of gold falls, and vice versa. This inverse relationship is the result of the Bretton Woods Agreement of 1944, under which the developed countries of the world agreed to peg the exchange rate of all currencies to the US dollar instead of gold. Even though this agreement ended in the 1970s, the dollar had become the dominant reserve currency in the world, as most currencies were exchanged against the dollar. Today, around 40% of global debt is denominated in US dollars.
The currencies of some oil-producing countries were stronger than the US dollar. But the U.S. dollar strengthened against them after shale gas exploration in 2016 reduced America’s dependence on oil and gas imports. The strengthening dollar has made loans denominated in US dollars more expensive. In 2016, Russia and China called for a single global currency not backed by any nation, but to no avail.
US dollar at 20-year high in 2022
In 2022, the United States became the world’s largest exporter of liquefied natural gas (LNG), particularly to Europe, weakening the euro against the dollar. European debt denominated in US dollars is increasing as Europe imports oil and gas from the United States at a higher rate.
On top of that, the US Fed’s interest rate hike is reducing the supply of dollars. The dollar is at its highest level in 20 years. Higher interest rates on the dollar have made it an attractive investment relative to non-producing gold.
Consequently, the price of gold continues to fall, while the US dollar continues to strengthen. The US dollar index has jumped 10.4% since the start of the year, which is quite high for an index that moves little. Is this the peak of the US dollar?
It’s hard to say, because the strength of the US dollar depends on the economic development of its country. The United States is better off than Europe and China, which are suffering from energy crises and COVID-related lockdowns respectively.
Should you buy Barrick Gold shares?
The strengthening dollar would fade if the US economy fell into a deep recession, and that is when the price of gold would rise. Many analysts and economists compare the current scenario with the recession of the 1970s. Gold prices jumped more than 600% between 1976 and 1980, while the US dollar weakened when the Fed raised rates interest rate of up to 20% to fight inflation of 13.5%. A similar inverse dynamic in the price of the dollar and gold was seen during the crisis of 2008-09 when the US dollar weakened.
This shows that gold always pays off when a crisis hits and the US dollar and stock market crash. Barrick Gold stock jumped 82% in two months (March 15 to May 15, 2020) after the pandemic crash. The stock traded around its high until November 2020, when vaccine news pulled the stock market out of the pandemic decline.
Barrick Gold shares move in tandem with the price of gold. Unlike physical gold, which does not generate income, Barrick Gold stock offers you an annual dividend yield of 2.62%. The company also pays a special performance dividend if its net cash increases.
Now is the time to buy shares of Barrick Gold as insurance against a deep recession. When the stock jumps 80-100%, you can sell it and protect your returns, as the stock will fall when the dollar strengthens with the economy.
