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.
Catherine Doyle, investment specialist, Real Return team, Newton Investment Management.
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