Gold has proven to be a safe-haven asset during periods of difficult economic times. Its market value has held up during recessions, depressions, and global conflict. There are clear signs of the economy slowing, coupled with growing concerns of a recession looming. Accordingly, investors may think this could be gold’s chance to outperform with positive returns.

While no one can predict the future, it’s prudent to consider gold’s historical returns to help forecast how it may perform in the future. We will also consider other economic and market factors at play that could also influence gold returns.

What Are the Recent Returns on Gold?

In 2022 so far, gold’s performance has been lackluster to say the least. When looking at gold returns over the past six months, gold is down 15.7%. At first glance, that performance may come as a disappointment to investors. But as recession fears are a top concern of financial markets, many assets (including precious metals and stocks) have been struggling. When gold is compared to the broader market, the precious metal’s performance is actually outperforming. The S&P 500, one of the major U.S. indices has fallen more than 24% this year. Gold’s current price is $1,643.83.

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Investors should closely examine gold's price performance and average annual returns before making any trading or investment decisions.

Gold returns have experienced periods of strong performance and underperformance relative to other asset classes. During the covid pandemic, investor worries mounted around the impact it would have on the global economy and financial system. During this period, the U.S. economy went into a brief recession, defined as a drop in gross domestic product for two consecutive quarters. This compelled many to add gold, a safe-haven, to their portfolios as a measure of safety.

As a result, SPDR Gold Shares (GLD) exchange-traded fund, which tracks the performance of gold bullion minus expenses, returned more than 24% in 2020, surpassing the S&P 500’s 18.2% return during the same period.

Taking a broader look at gold’s past performance, over the past 5 years, gold delivered a 28% return. Gold futures contracts also notched an all-time high price during this time. And over a 20-year period, gold’s price rose 426.22%. Over the long run, gold’s future performance appears to be strong.

But considering several factors including inflation, the war in Ukraine, the energy crisis in Europe, and the overall economic uncertainty of a potential recession looming in the U.S., gold investors may be wondering why gold performance hasn’t broken out recently. There are several reasons that may address why gold hasn't seen rising prices.

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Gold is more than a shiny metal! It was once the world's reserve currency of choice. Pure gold bars are still held by many financial institutions today.

4 Factors Holding Gold Back

1.) Rising Interest Rates

Prices of goods and services in the global economy have been on the rise without any signs of coming down. In an effort to quell the burden of inflation, the central bank in the U.S. known as the Federal Reserve has been increasing interest rates to keep economic activity at bay. Other central banks have followed suit. This has put pressure on gold’s performance because the direction of interest rates and gold’s performance are inversely related. Historically, when interest rates go up, the price of gold goes down, and when interest rates are low, gold prices increase.

2.) The Strong Dollar

The strength of the U.S. dollar may also influence gold’s performance. Since gold is denominated in U.S. dollars, it may move in the opposite direction of the dollar. The value of the dollar has been on the rise, hitting 40-year highs. Within the past year, the U.S. dollar Index (DXY) is up 20.4%, which has been weighing on the precious metal, keeping it lower. On the flip side, physical gold is widely known as a hedge against the U.S. dollar, so when the price of the greenback is weak, gold’s price tends to increase.

3.) High Bond Yields

Given the level of market uncertainty, investors are seeking refuge in bonds because they are low risk investments that offer modest returns. But lately, short term U.S. Treasury yields are offering higher returns to investors. The U.S. 2-year Treasury note is yielding 4.5%. That’s up 372% year-to-date—an extremely sharp rise. This outperformance may be pressuring gold as investors are looking to get as much yield as they can to fight inflation but without taking too much risk, given the market uncertainty.

4.) Stock Investing

Even though the stock market hasn’t been performing well in 2022, individual stocks still remain the growth part of an investment portfolio. This means investors cannot abandon stocks when they are down. According to history, the equity market has short periods of volatility, even bear markets, but over time, the market grows in value, and so will your portfolio. It’s important to add: not all areas of the market are down.

For example, oil stocks including Chevron (CVX) and Exxon Mobil (XOM) are up 37.5% and 64.4% year-to-date respectively, as the energy sector has been an outperformer this year. Some investors may be able to stock pick and perform better than the broader market. This dynamic is not in gold’s favor.

Thoughts on Future Returns for Gold

Global gold demand has a habit of following economic cycles. We can’t predict the future results and that includes forecasting how gold may perform. But given fears of an imminent recession, gold has the possibility of performing well.

Gold Price 2021

The gold market has a proven track record of entering a bull market during periods of economic crisis, global financial crisis, or geopolitical uncertainty.

Let’s take a look at how gold performed during recessionary periods. According to the U.S. Bureau of Labor Statistics, between 2008 (the height of the Great Recession) and 2012, gold’s value increased 101.1% in the producer price index for gold.

Gold is considered a safe-haven asset. Investors flock to safe investments during challenging economic times, which was the catalyst behind the drastic rise of the precious metal during the last crisis. Between September 2010 and September 2011, gold prices rose 50.6%, as the economy was still in recovery mode and the capital markets were still pretty volatile.

Gold also has an inverse relationship with the dollar and the money supply. This means it tends to see a price increase when the USD loses purchasing power. Conversely, the yellow metal usually sees negative returns when the benchmark interest rate is rising. As a physical asset, gold has low correlations with other financial instruments, making it an important part of a diversified portfolio. This is a key principle of wealth management.

When considering gold’s timeless characteristics, there is a possibility the precious metal can bounce back in the future, especially during challenging market conditions. However, investors should consider the aforementioned factors that may weigh on gold’s performance, as well as their personal risk tolerance.

Written by Paulina Likos

Read more from the author about precious metal investments:

4 Reasons Why Dave Ramsey Is Wrong About Gold

7 Proven Reasons to Invest in Gold

How to Invest in a Gold IRA

Gold-Silver Ratio (GSR) Explained: Definition and Trading Strategies

Gold Mutual Funds (Gold Funds) vs Gold ETFs: What's the Difference?

Investor's Guide to the London Silver Fix

Gold vs Cash: Comparing the Pros and Cons

How to Invest in Gold Mining Stocks (Gold Stocks)

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