over 3 years ago • 4 mins
Investors betting on continued gains in the price of gold might end up as one of those rarities: a disappointed pessimist.
Gold has been one of the best places to put your money over the past couple of years, surging more than 75% in the period to hit a record in August.
And even after a retreat from those lofty heights, the precious metal’s returns are more than triple the US stock market’s gains.
But with few signs of inflation on the horizon and a small but noticeable bump in the returns available on other safe investments like US government debt, the shiny metal’s appeal may be fading.
First up: inflation. One of gold’s major appeals is that it's a physical asset that – unlike the dollar or the euro – can’t be eroded by an excess of money in the economy. In 10 years’ time an ounce of gold will remain exactly as it is: a small lump of inert metal.
However, as we discussed with James Rossiter, head of global macro strategy at TD Securities, for a Premium Insight earlier this month, the COVID pandemic will on balance probably push the prices of everyday goods down rather than up. Because so many people have lost their jobs – and the spending power that comes with employment – deflation is more likely than inflation. Ludovic Subran, chief economist at Allianz, concurred with this assessment when I put it to him at a Finimize event last week.
In addition, this month’s death of Supreme Court Justice Ruth Bader Ginsburg threatens to divert US politicians’ attention towards fighting over who will replace her – and away from the stimulus package they had been debating. If they can’t agree on a deal before breaking for the election, it’ll keep some $2 trillion out of the US economy. Morgan Stanley recently estimated the chance of a deal as low as 1 in 3.
And, talking about the election, Invesco calculated this week that the US president’s “erratic” behavior has pushed up the price of a ounce of gold by $230. They reckon that gold will fall if the election brings in a new president – assuming the incumbent hands over power quietly.
Now let’s look at how trends in other markets are affecting the relative attractiveness of gold as an investment.
Gold’s price tends to move inversely to the real yield (the nominal yield minus inflation) available on that other famous financial safe haven: US government bonds. This is because a rising bond yield makes gold’s yield of zero relatively less attractive. Although it’s worth noting that the real yield on US Treasury bonds is still well below zero for the moment.
The chart below plots the inverted gold price, in blue, against the real yield on US Treasury bonds, in white. When real yields rise, gold tends to fall. And in recent weeks the real yield has broken through its moving average – shown in pink – suggesting that the move higher has some momentum behind it.
As we move out of crisis mode and the pandemic becomes just another fact of life, gold may continue its steady decline. This is what happened as the world slowly recovered from the shock of the 2008 global financial crisis – an ounce of gold dropped from about $1,900 in 2011 to just $1,200 in 2013.
And a change in who’s been buying gold recently may further that pressure. According to World Gold Council figures, demand this year has been being driven by financial buyers pushing money into gold-backed exchange traded funds (ETFs) rather than from the Asian jewelry markets that usually account for the majority of buyers.
If investor sentiment flips, these ETFs could experience sudden outflows, removing a key support from this year’s rally. And in an early sign that speculators may be getting cold feet, the SPDR Gold Shares ETF, the biggest in the sector, recorded its first withdrawals in eight months in September.
Of course, we’re living in difficult times and should the pandemic enter a new and uglier phase investors will no doubt head for havens once more. But their enthusiasm for gold as a safe port in the storm may be tempered by memories of March, when the metal tumbled along with everything else during the darkest days of COVID panic.
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