EDITOR NOTE: There are plenty of narratives framing the pullback in gold from its August 2020 (spot) high of around $2,089 an ounce. Much of them, predictably, are centered on confidence in recovery--the dollar, the economy, vaccine availability, an outstanding Employment Situation report, etc. In the midst of the pandemic last year, even a near-term forecast was made virtually impossible by the fog of uncertainty that blanketed the horizon on several levels, from the healthcare crisis to the presidential election. That fog has been lifted, and Americans are once again willing to spend and load up on massive credit card debt (the latest report showed a 10-fold increase over economist expectations). Nevertheless, we can’t look at the edges of what the fog lift has enabled us to see as the actual “horizon.” The fog is still there, just farther away. And the volatility that it hides, the inflationary storm that we know is there but slightly out of sight, is what investors should worry about, and what smart money is bracing to weather. These factors will serve as the tailwinds to gains in gold and gold’s continuing bull cycle.
After suffering its biggest quarterly loss since 2016, gold stands as one of the few commodities trading lower this year. But prices still have room to run higher even if the global economy continues to recover and the pandemic moves closer to an end.
“Gold has played its typical role as an insurance against market disruption and as a haven asset,” says Frederic Panizzutti, head of institutional and central bank sales at precious metals trader and refiner MKS.
“In the course of the last year, markets had little visibility” around the Covid-19 crisis, and didn’t know when a vaccine would become available or how long lockdowns or trans-border travel restrictions would last, he says. “In the context of uncertainties, the market needed some sort of financial anchor, a safe haven—and gold seemed to be the answer.”
Gold futures gained nearly 25% in 2020, their largest yearly climb in a decade. So far this year, the metal trades around 8% lower, after losing 9.5% in the first quarter, bucking an overall up trend for commodities prices.
The metal was available, but “not at the right place at the right time, and premiums climbed in some parts of the world” as investors were looking for the physical metal, says Panizzutti, adding that it “remained scarce in some parts of the world.”
From March 2020, well into the third and fourth quarter of that year, there was strong gold demand—and prices—in the U.S. and Europe, says Kevin Rich, global gold market advisor for the Perth Mint.
During the same period, there was “very low gold demand” in Asia and gold traded at discounts across Asian markets, he says.
This year, “we have seen a reversal of this, with a reduction in Western investment demand and softening of prices, while Asia markets have moved to premiums and demand has picked up strongly.”
Without this dynamic between the east and west, there may have been more gold price volatility and weakness, he says.
Much of gold’s move lower this year has been blamed on the rise in the U.S. dollar and Treasury yields.
“Investors shifted into Treasury products to have a return on their investments,” says Panizzutti. Rising bond yields can dull investor interest in gold, which offers no yield.