Recent data from the US Mint shows that demand for physical gold has surged since 2020. Record high inflation and losses in financial assets are severely impacting purchasing power, and gold prices have outperformed the majority of other commonly held financial assets in 2022.
For those still weighing whether we are in a bear market or not, Vijay L Bhambwani, a currencies and commodities expert, points out that for traders, “long positions have been bleeding” and “resulting in margin calls week-on-week for months”.
With a record high retail inflation in the US last week, hopes of easing inflationary pressures were dashed, resulting in a historic rate hike of 75 bps by the Federal Reserve. Food-at-home costs increased to 11.9% year-on-year, the highest since April of 1979.
With no sign of inflationary pressures easing, households may have to accept the possibility of an extended period of financial hardship and steep declines in purchasing power.
Despite claims of the demise of gold and no shortage of lousy press received this year, the yellow metal has preserved its value year-to-date (YTD). It has significantly outperformed the basket of assets in the above graph.
Physical gold is a unique albeit often overlooked animal. Perhaps the most startling fact is the surging demand for physical and not paper gold when financial assets are bleeding. This trend may have gone largely undetected because physical gold is a price taker of paper gold.
Crucially, gold has been money for thousands of years. Due to its permanence and the inability to simply be created by an act of will of monetary authorities, gold has maintained a lasting and universal appeal as a currency of exchange and store of value.
Unlike assets in the financial system, gold does not incur a counter-party risk. Unlike capital appreciation of equities, dividend returns, or bond pay-outs, there is no risk of expected financial returns not materializing or remaining unpaid. Its value does not depend on a future stream of cash flows.
In 1971, President Nixon took the dollar off the gold standard. Professor Harold James of Stanford University described this as having “severed the millennia-long link between money and precious metals.”
The Fed’s 75 bps hike should be highly damaging for gold, at least in theory. However, today gold is trading 0.6% up.
This may signal that with heavy market uncertainty and the reversal of the Fed hike relief rally, market demand for physical gold may maintain a strong uptrend, especially as an instrument of wealth insurance.
Given the historic rate hike, metal investors will be keeping a close eye on physical sales data from the US Mint.