After an impressive ascent, the price of gold faltered. To keep rallying, there needs to be a driver.
Here is an excerpt from the article that originally appeared in the Wall Street Journal:
Signalling inflation?
The Federal Reserve and other central banks are underpinning an explosion of bank reserves, while governments are handing out money. Investors think there will be more inflation on the way than they thought in March (when the consensus was that inflation was dead). But other, well-traded assets aren't preparing for significant inflation. It is hard to believe that gold would send such a different signal.
The link to tech stocks
It is plausible that massive quantitative easing combined with increased savings during the pandemic has led investors to buy anything regarded as reliable. That includes the big tech stocks, where investors think future profits are a sure thing, as well as gold. The metal developed a decent link to the performance of technology stocks: When the Nasdaq roared ahead, so did gold, reversing the pattern from earlier in the year.
The dollar
The dollar is not about to lose its status as the world's anchor currency. But whatever the (minuscule) probability before the pandemic of the dollar ending its reign, it is clearly much higher now as America withdraws from international engagement and takes on China. That higher probability justifies diversification, and while it would be strange indeed to adopt gold again, the metal has history on its side.
The safe haven
Gold offers perhaps the best form of catastrophe insurance, as it is widely negotiable and reasonably easy to smuggle out of a country. The probability of a societal collapse remains tiny, and at best this accounts for only a small portion of the price rise.
The gold rush
Sharp asset-price rises generate their own momentum, and gold had begun to attract lots of private-investor buying via exchange-traded funds, or ETFs. At least some of the recent jump -- and the subsequent big fall -- are probably driven by excessive short-term optimism leading to overdone moves that partially corrected.
Conclusion: Gold needs more trouble to prosper
Negative real interest rates on Treasury Inflation-Protected Securities, or TIPS, are already the lowest ever, and need either much higher inflation or the prospect of negative rates from the Fed to drop a lot more.
Gold tended to do well when Covid-19 infection rates rose and the economy suffered, and badly when they fell and the economy recovered faster than expected. If economic recovery continues, expect gold to suffer: There will be less need for insurance, fewer worries about the dollar's reserve status and lower prospects of more Fed action.
If the Fed lets inflation rip gold might ultimately rise a lot more -- but for now, investors see little chance of this.
