“And to take a more recent example: after the end of the first full trading week after Russia’s full-scale invasion of Ukraine in February 2022, the price of gold increased by only 1 .3% (but after 5 additional days of almost 8%), while the MSCI World index reacted only slightly negatively, and this with a certain delay: 5 days after the Russian assault, the MSCI World was actually up 2%, after 10 days it was slightly in the red. After two full months, gold was still up almost 2%, while the MSCI World index was still slightly in the red. red.
These two comparative examples show that context matters when it comes to the price of gold. With the growing popularity of exchange-traded vehicles for gold investments, the technical aspects of the market likely matter more today than in decades past. The appeal of metals may also have been boosted by the lack of short-term alternatives, with the MSCI World Index down around 2% since October 6.thand bonds offering the opposite of protection in recent weeks.
Our chart for the week highlights the importance of context in a slightly different way, by showing the price of gold relative to the inverse of nominal. yields on 10-year U.S. Treasuries since 1980. By this measure at least, the precious metal is now trading about where it should be. Of course, the problem with such a statement is that there is no obvious way to value gold. The metal does not generate real “gains”. However, the opportunity cost of holding it could be captured by the returns generated by other safe assets, such as U.S. Treasuries. Purists will argue that a better indicator of the opportunity cost of owning gold would be real rather than nominal interest rates. However, these are difficult to estimate or measure, especially if we go back several decades.
History also shows that gold cannot be relied upon to fulfill its function as hedge against inflation during periods of secular decline in inflation and nominal interest rates. For example, gold lost more than 80% in real terms between 1980 and 2001.(4) This is worth keeping in mind when assessing the medium-term outlook for the price of gold, should interest rates remain high for longer than expected. Furthermore, we believe that we have reached the end of the current upcycle and that the increased prospects of a recession will help maintain a floor below the price of gold. Continued bullion purchases by central banks, such as China and India, should also be supportive. Ironically, inflation data would also be weaker, at least in the short to medium term.