Gold will soon regain its lustre

published 26 February 2021

“Everything’s glittering except for gold”, writes Mike Bird in The Wall Street Journal. You’d think these would be good times for gold. Commodities are roaring and central bankers seem keen to stoke inflation. Yet the yellow metal is being left behind. Trading at around $1,810/oz (£1,280/oz) this week gold is still more than 10% short of its early August highs. Even silver has been attracting more interest of late thanks to Reddit traders.

The idea that the surge in bitcoin, dubbed “digital gold” by some, is overshadowing the real thing has become a market commonplace, says Joe Weisenthal on Bloomberg. But it isn’t true. Bitcoin is really a “risk-on” asset that is more comparable with a stock like Tesla. Gold, by contrast, is a traditional safe haven strongly influenced by real interest rates (ie, interest rates adjusted for inflation). The metal’s main drawback as an asset is that it pays no interest, so when real interest rates rise – as they have done so far this year – investors tend to sell gold to buy up other assets.

Gold has had a “sour” start to the year, says Myra Saefong in Barron’s. Yet the longer term outlook remains encouraging. The current market rally rests on the unsteady base of “government stimulus and money printing”, says Peter Grosskopf of investment manager Sprott. Soaring US debt levels and a more inflationary outlook could yet prove a “tailwind” for gold.