Ain’t Nothing But A Gold Digger

Ain’t Nothing But A Gold Digger

over 4 years ago2 mins

Gold is having a moment in the sun, and boy, is it glistening. The precious metal is up almost 20% in 2019 – trading at its highest price in six years – and investors are pouring the most money into gold exchange-traded funds since 2013.

But gold is generally viewed as a good place to hold money when inflation’s on the rise. That makes its recent surge in popularity a little baffling: US inflation is sitting below the Federal Reserve’s (the Fed’s) 2% target, while the eurozone and Japan are flirting with outright deflation (when prices of goods and services start falling). A look at the bond market could help us understand just what’s happening...

What's going on here?

Gold is often derided as an unproductive investment. Where stocks generally pay dividends and bonds a regular coupon, gold kind of just… sits there. For all its regal connotations, it’s not exactly the most glamorous of assets.

But gold’s non-existent payout starts to look mighty tempting when there’s an increasing number of bonds with a negative yield. Even a return of zero is better than having to pay for the privilege of owning an asset, after all. And that might explain why the gold price has closely tracked the amount of negatively-yielding bonds in recent years.

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Why should I care?

The current popularity of gold suggests investors are steeling themselves for a rough ride to come for the global economy. Some analysts even raised their forecasts for gold prices this week, in the expectation that the Fed will trim interest rates by a full percentage point before next summer.

And gold isn’t the only safe haven asset to have gotten a boost recently. Good old cash is also benefiting from the low yields offered by bonds: in the past year alone, the world’s wealthy have switched more of their investments into cash – and have shown their bond holdings the exit.

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