Blink and you missed it, but on Sunday night and into the early hours of Monday gold reached a record of more than US$2 135 a troy ounce — and promptly fell back. Gold is now about 6% lower than that fleeting zenith and essentially unchanged from where it was a week ago. This isn’t the behaviour we expect of serious millennia-old asset classes; that’s what magical new-age virtual tokens are for.
Gold’s Icarus-like flight to new heights was probably triggered by a stop-loss in the derivatives market that prompted a raft of algorithmic buying, as the yellow metal has been bumping up against these record levels for the past three years. What’s missing is a logical reason why this trusted store of value might suddenly be worth so much more — but then failed to sustain that new high. This sort of fickle price action often leads to a trend reversal.
Bitcoin has also climbed, pushing up above $40 000 to its highest level for 20 months on Monday as well, though in fairness it’s not only held on to those gains but extended the rally to flirt with $44 000. There is a link here, as cryptocurrencies and gold are viewed by doomsday preppers as their salvation if regular fiat currencies cease being viable methods of exchange. Bartering gold bullion for vital household items is about as likely as being able to access virtual cash if a catastrophe knocks out the power grid or the web. The subtle difference here is Gen Z tech bros versus baby boomer gold-bugs — this fixation is for life.
The World Gold Council attributed gold’s sudden spike to short-term technical trading. “The longer-term story, that of strong central bank gold buying, probably had nothing to do with Monday’s quick move,” John Reade, the WGC’s market strategist, said in a statement. “By far the most important financial market drivers of gold will be the US dollar and the amount of cuts priced into the US interest rate market.”
Central banks have certainly been the biggest buyers; according to Metal Focus data, they’ve added 800 metric tons of gold this year. China has led the purchases, accumulating 180 million tons, followed by Singapore and India. But these numbers need to be treated cautiously: between 2009 and 2015, China reported no change in holdings, only to reveal that it had bought 1 650t of the metal over the period. Similarly, it reported no purchases at all in five of the preceding six years. Central banks report transactions intermittently to the International Monetary Fund. In an echo of bitcoin mining, gold flows are opaque largely because it suits the major players for them to remain that way.
Tailwinds
It’s not been one-way buying traffic, as high prices have reduced jewellery demand despite favourable seasonal factors. Consumer demand usually picks up before Diwali in November and tends to stay strong through the Lunar New Year in February. Exchange-traded funds have sold over 100 million metric tons of physical gold this year, an offload of 8%. And then there’s the supply side, with mine production this year up 6% to a record 1 267t. Recycling has increased 8% to nearly 300 million tons.
Gold took its time to break above $2 000 an ounce, having had significant tailwinds in recent years. A weaker dollar seems to be the crucial factor, with the US currency declining 3% as future Federal Reserve rate cuts are anticipated. Expectations for slower US growth feeding into a higher gold price is the most logical rationale for recent gains. Many of the other popular theories, such as flight from the dollar to alternatives or the Gaza conflict, are coincident rather than catalysts.
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According to Deutsche Bank analysts, on an inflation-adjusted basis gold is 20% off the 1980 all-time high. They calculate that since 1800, gold has delivered a real return of 0.3%/year compared with 3% from 10-year US government bonds (or their equivalent predecessors) or 6.8% on US equities. The metal has proved to be a suboptimal hedge against the rising cost of living. Furthermore, gold no longer reacts consistently to geopolitical crises. If oil is lower on the Middle East crisis, then it’s unlikely to be the driver for higher gold prices. Similarly, the de-dollarisation concept still hasn’t gained any traction.
Comparing returns on the yellow metal to inflation-adjusted bond yields is too abstract a theory. As my colleague John Stepek wrote this week: “The flipside of falling interest rates being ‘good’ for the gold price is that rising interest rates should’ve been bad for gold, and they haven’t been (at least not to the extent that models based on ‘real’ interest rates would imply).”
The speed which gold both rose and then fell this week ought to be worrying for investors who rely on it as a cornerstone. It’s no longer a given that gold is actually a reliable haven. It still yields nothing, costs money to store, can be stolen and has very little practical usage bar looking pretty (if that’s your thing). We’re not quite at cryptocurrency justification standards, but simply “hodling” gold forever doesn’t stack up as a respectable portfolio strategy.
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Even if the machinations of bitcoin defy sensible economic analysis, cryptocurrencies can at least be admired as the perfect instruments for pure speculation. Gold’s sudden inexplicable moves suggests it’s easily manipulated and no longer reacting to economic forces in a consistently investable fashion — and unlike the crypto bros and gals, most of gold’s owners are old enough to know better than to place their financial trust in a dumb rock. — Marcus Ashworth, (c) 2023 Bloomberg LP
