No longer glittering?

With the gold price trending lower in recent months, we assess the outlook for the precious metal.

• Gold has been left behind as the narrative has shifted to the overriding themes of rising real bond yields and the potential emergence of inflation as the recovery takes hold.
• Gold is now at a delicate juncture. Steadily rising inflation could keep real yields in check, paving the way for gold to deliver a creditable performance. But a rising-yield environment combined with a strengthening US dollar would present a more challenging environment for the precious metal.
• Bitcoin and other cryptocurrencies could also affect demand for their more glittering rival.

After hitting an all-time peak above US$2,000 in August 2020, gold has traced a less glittering path over recent months, taking a decisive leg down since the beginning of the year. With Covid-19 vaccine programmes firmly in the picture, albeit with differentiation in the pace of the rollout between countries, the market narrative has shifted to the overriding themes of rising real bond yields and the potential emergence of inflation as the recovery takes hold. This has been coupled with a more reflationary tone in equity markets, and while industrial commodities, such as copper, have surged ahead anticipating a full-blown recovery, gold has been left behind, perhaps unsurprisingly given its countercyclical rather than pro-cyclical characteristics.

This is a delicate juncture in terms of prospects for the gold price. The jury is out as to how far and fast real rates can rise – high levels of indebtedness may well place a cap on yield rises – and while short-term inflation seems an inevitability owing to base-rate effects, it is unclear how sustained inflationary pressures will be. Moreover, the US-dollar appreciation witnessed since the beginning of the year could be unhelpful for the gold price, particularly if coupled with rising real yields.

A more rosy scenario for the precious metal would be the emergence of broader inflationary pressures owing to a combination of input-price appreciation, a build-up of capacity constraints within industries, and true wage growth. Should the playbook of 2002-2007 unfold, steadily rising inflation could keep real yields in check, paving the way for gold to deliver a creditable performance. On the flip side, in the event that rising yields continue to dominate, in conjunction with a strengthening US dollar, this would present a more challenging environment for the precious metal.

In summary, we find ourselves at a crossroads. Further clarity is needed in order to establish the most likely trajectory and determine whether gold will remain unloved by investors. It would also be remiss not to mention the new kid on the block: Bitcoin (and cryptocurrencies more broadly). These may exacerbate the dampening effect on the price of their more glittering rival owing to their appeal among the millennial generation, who may view digital assets as being interchangeable with gold on account of their status outside the traditional monetary system. Given all the considerations mentioned above, only time will tell how gold fares and whether its time-honoured role as a safe-haven asset with inflation-hedging properties will be deemed both relevant and valuable in the context of potentially more dominant macroeconomic forces.

Authors

Catherine Doyle

Investment specialist