Investors Undecided over Gold as Economic Downturn Inches Closer

Investors have been fleeing the stock market en masse as an economic downturn starts to look imminent. The Fed’s aggressive rate hikes to tame inflation are scaring off Wall Street, with investors and hedge fund managers moving their assets in all different directions.

The precarious tech sell-off in May sent the broader S&P 500 sinking, and by the start of June, all three leading stock market indices ended May in the negative. The macroeconomics show that more than $7 trillion has been wiped off the stock market this year alone, with the S&P 500, the U.S. benchmark index losing around 18% since the end of December.

The uneasiness comes as rampant inflation has seen consumer prices skyrocketing, and geopolitical tension places a damper on the global supply chain and natural resources.

Even as this has been unfolding over the last couple of months, investors have remained hawkish over the premise of gold, as prices have yet to gain much traction over the last couple of weeks.

Amid the tech sell-off in May, gold prices were seen stabilizing as the broader market retreated and stock prices plummeted. Gold saw a slow climb to $1,880, which dropped again on May 13, 2022, as the weaker dollar and rising U.S. Treasury Yields looked more promising and gold retreated closer to $1,700.

The 1,700 mark would remain well into June 2022 when gold finally started catching up again with the broader market. Since then, gold has coiled around $1,830, moving slightly as the market inches closer to correction territory. Against all odds, U.S. gold futures declined by 0.2% in single-day trading on June 23, 2022, with gold prices standing at $1,834.

So, while it’s looking as if the yellow metal could climb in the coming months as investors and fund managers look to park their cash in recession-proof investments, why has the greater market remained somewhat bearish over the performance of gold.

It would make sense for investors to consider the premise of gold, especially with more economists suggesting a looming recession. History repeats itself, and we see that with gold against the market performance.

If you look at the highest gold price ever, in most recent years, which was back in August 2020, with prices coiling close to $2,074, which comes in the later stage of the pandemic and slower economic activity.

As the United States was grappling with surging COVID outbreaks, record unemployment, political uncertainty and a severe economic downturn, ensuing lockdowns kept most of the country and the world at a standstill while investors looked at gold as a haven in the broader market.

Looking back, we see that around this time, the U.S. benchmark, S&P was also struggling to regain traction, as the bear market was entering its final days, seeing the index stand 0.11% above its low of February 2020.

Gold, on the other hand, was enjoying a more celebrated performance, but although the high prices did seem attractive, it wasn’t long-lived, and prices would later retreat close to $1,765.

It’s an interesting predicament we’re currently standing in, as it’s not yet clear whether we’ll be able to see gold hit new highs in the coming months.

Gold in a Time of Fintech

As the market experiences major headwinds from all sides slowing economic performance, there has been some tension between the usability, acceptance and trading of gold in a time when monetary systems have become highly digitized.

There’s no shortage of advanced software and technology that can help to support these systems, and in more recent times, as fiat currencies have become under pressure due to economic uncertainty and inflationary conditions, digital gold has perhaps become a secondary solution for seasoned buyers, banks, governments and novice traders.

The premise of digital gold, much like that of cryptocurrencies, can allow tech-savvy buyers and traders easier access to the gold and precious metals market. In 2020, reports by the World Gold Council (WGC) revealed that the market demand for physical gold increased by 40%; this came at a time of high economic uncertainty and bearish investor sentiment.

The involvement of technology and software trading mobile applications has already made a range of financial instruments more accessible to a larger number of interested buyers. We’ve seen this with robo-advisors and forex trading apps that now allow regular individuals to claim their stake within the capital market.

But, the digitization of physical gold does raise additional regulatory issues, which in time have seen new policies and reforms, such as Basel III introduced. The Basel III policy would now make it a requirement for banks to put 85% of their unallocated gold in cash. The previous requirement for this was zero percent, but the recent introduction of Basel could make unallocated gold more expensive in the long run.

For fintech startups, this would also mean that gold could become more accessible but with a heavier price tag, which could see less interest from the general public. But, in the same breath, we see how digital gold could improve the monetary systems of specific industries and incentivize financial development.

Seeing as the gold landscape is rapidly changing, fintech startups would need to design and develop tools suited for both businesses and consumers. The importance of B2B and B2B2C is a means by which gold buyers could penetrate the market more freely without having to find any roadblocks imposed by policies.

For gold in the time of fintech development, it could mean that market demand can become alleviated over time, and seeing as precious metals can’t be duplicated or printed, such as coins or paper fiat currencies, we might not see such a strong devaluation of the yellow metal in the coming years.

On the open market, where conditions have been relatively choppy since the start of the year, we might see a change in sentiment from younger investors looking to secure recession-proof portfolios against the backdrop of a sudden economic slowdown.

This could bring traditional gold traders into question as well who might already own some physical gold in some shape and form, longing to see whether it’s possible to digitize their gold, perhaps making it more secure and lucrative in the long run.

The most work required, for now at least, lies within the research and development (R&D) of these systems that could aid in the accessibility of gold but further ensure more stable market conditions. In the broader sense, this could sidestep conditions such as those we’ve already experienced this year but also ensure more credibility for gold.

Gold in the Coming Months

The argument is divided, as some market experts and analysts predict that this could be another record-breaking year for gold as investors and novice market lenders try to jump onto the gold bandwagon while economic uncertainty persists.

We have a side of the market that argues that if gold is not able to break its $1,880 threshold, buyers and investors won’t be so eager to climb back into the market. The psychological tug and pull this has on the greater performance of the market has kept many investors at, for now at least.

Some suggest that gold could break the trend, sinking to $1,800 in the coming months, but this could push it in an upward direction as prices are lower, and investors are more eager to buy in at the time.

But, there’s constant pressure on the price of gold, not just on the market side but from an economic standpoint. The FOMC and the aggressive rate hikes are not only cooling down the market but turning investment sentiment bearish.

Perhaps the most significant part here is that a majority of the market, the older generations tend to believe that gold is still the ultimate hedge against inflation and a safe haven during an economic downturn.

Gold is to boomers, what crypto is to millennials and Gen Zers.

This statement could perhaps be why the interest in digital gold, or gold in the age of fintech, can become so important, not just for younger buyers and traders but those who are willing to adapt and make some modernizations to their portfolios as well.

If gold is more treated as a digital asset, or parts thereof at least, we might have more interest coming from the market, as this could allow them better and more streamlined access to the commodities market. Instead of having to invest in Gold ETFs or even gold mining companies, some novice traders will now be able to come in direct contact with gold purchasing options.

In the event that there is more movement towards gold becoming a part of the fintech industry, price changes will become more frequent, in the beginning at least.

But, based on our understanding of how gold has traded in the last few months, and if we look at what historical cycles reveal, there’s a slight chance that gold could make some upward swings in the coming months. The increase could come from two sides, either traditional investors parking their cash in recession-proof gold or some looking towards the progressive development of gold as part of the fintech industry.

It’s a tough call to make, considering which way the price needle may swing in the next few months. Yet, there’s also no real direction we could see gold move, but if history repeats itself, for the better part, at least, investors should consider the possibilities of gold. The metal is not only persistent but there’s still room for further advancement, making the yellow metal even more resilient in the face of greater market slowdowns.

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