With all the talk about inflation at present, one might imagine that Gold has rocketed in recent weeks, yet since August 2020 it has fallen 15% despite those concerns becoming mainstream.
Gold moves on a number of (constantly changing) factors, including moves in the US Dollar, fear of inflation, geo-political shocks (wars etc.), but at present it appears that investors are focussing on real interest rates, where bond yields are rising faster than the rate of inflation.
As real rates rise, Gold becomes less attractive than do interest generating assets such as bonds.
But this could change, as, in a high debt world, rises in real rates could easily lead to another economic slowdown, whereby real yields fall once again.
There are however a number of scenarios where Gold gains, whatever the justification turns out to be.
- Clearly a rise in inflation would be good for Gold at some point, provided real rates do not continue to rise at the pace of recent weeks.If they do, there is, as previously stated, a real risk of recession, leading once again to lower bond yields. If we see a genuine pass through in costs (for example from Commodities) by Corporations, this will raise overall prices.
- There is an ever-present threat of geo-political conflict, with the Middle East seeing civil wars in Yemen, Syria, Iraq and Libya, any one of which could lead to a square-off between Israel, Iran and/or Saudi Arabia.
- In relative performance terms, Gold is also looking increasingly attractive compared to equities. As this chart shows, the ratio of the S&P 500 to Gold is close to all-time highs, having recovered losses briefly incurred during the onset of the pandemic. It fits well with the “safe haven” narrative, whereby a selloff in equities often leads to bullion buying.
- In terms of positioning, according to the latest CFTC’s Commitment of Traders report, speculative traders in Gold have almost entirely erased the bullish euphoria of 2019, with net long exposures back to May 2019 levels.This “wash-out” often precedes the start of new up-trends, as there are relatively few natural sellers around.
As to timing, it may be a little early to pull the trigger on long positions immediately. Recent very tight correlations between Gold and Real Yields appear to require another Gold fall or a new upsurge in real yields before the set-up is complete.
Also, US Dollar exposures have now gone net long for the first time since November 2020- traditionally, USD strength is Gold negative.
The outlook is starting to brighten, and a decent rally may be imminent. The explanation for this move may be different this time, but the result should be a sizeable rise in prices.