King Midas lusted after it. The Incas worshipped it. Shiny flakes of it set off a 19th-century rush to California and families in India have poured their life savings into it for ages. Gold’s allure remains as untarnished as the noble metal itself. But its price is subject equally to manias and periods of ambivalence. Since the turn of the millennium, gold has seen a seven-fold rally, a 45% crash and sustained periods where prices moved very little. The drivers of sentiment change over time, and understanding how they shift can be as revealing about the collective psyche of global investors as it is about the nature of bullion itself. Just what is it that keeps investors coming back to gold?
Bullion’s time-honored appeal as a haven from unexpected events was demonstrated in 2016 after Donald Trump was elected U.S. president in an upset. It surged as much as 5 percent within hours, then slid back as fears eased and stock markets rallied on expectations he would boost government spending. What followed was two years of steady prices, with every rally capped as gold approached $1,350 an ounce. That changed in 2019, when slowing global economic growth, worries over tensions in the Middle East and a trade war between the world’s biggest economies dented the belief that riskier assets would continue climbing. Holdings in bullion-backed exchange-traded funds started rising, hedge funds bet on higher prices and central banks piled in to reduce their exposure to the U.S. dollar. Billionaire investor Paul Tudor Jones even said in June, 2019 that gold was his favorite pick among assets and that it could hit $1,700 within 12 to 24 months. With interest rates and bond yields at historic lows, the opportunity cost of owning gold has largely evaporated.
Discarded as a monetary system when its peg to the dollar ended in the 1970s, gold spiked to $850 in 1980 on a bout of inflation. Prices slumped in the following two decades as central banks around the world shrank their reserves and miners locked in prices for future production. The launch of the first gold ETF in 2003, which made it possible for retail and equity-market investors to directly access the metal via their stockbrokers, set off a wave of gold buying that lifted prices for almost a decade. Then the 2008 financial crisis sent prices steadily up to a record high in 2011 as money was parked in havens on fear that bond-buying by central banks would lead to hyperinflation. Even so, some investors never warmed to gold. Legendary business guru Warren Buffett expressed his disdain for the metal because it has no inherent yield and isn’t productive like, say, companies or farmland. He wrote in 2012 that investors in gold are motivated by their “belief that the ranks of the fearful will grow.”
More than perhaps any other investment, bullion acts as an echo chamber for anxieties about the global financial system and the ability of central bankers to keep economic growth going. Gold bears say it is a relic of history and that there are better ways of hedging against uncertainty, including financial instruments such as derivatives. Bulls say it offers them a simpler way to protect against a wider range of risks. Demand for gold is supported by rising incomes in China, India and other Asian countries, where families often buy it for dowries and there are fewer safe stores of wealth. In the West, some fans of gold, known as “gold bugs,” believe it should be restored to its place as the guarantor of government-issued currencies. Even one of Trump’s nominees for the Federal Reserve was historically an advocate of returning to the gold standard. But ultimately, gold’s reputation for withstanding the effects of inflation — at the cost of sacrificing yield — comes into its own when interest rates on bonds drop below the rate of general price increases. Compared with the trillions of dollars’ worth of bonds around the world now delivering negative returns, gold is shining once again.
--With assistance from Nicholas Larkin.
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First published April 14, 2015
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