It’s tempting to attribute the vogue for gold to a desire for a safe haven during the pandemic — a kind of financial panic reflex that will release as the crisis abates. But the gold mania is also driven by a hunch that the easy money pouring out of central banks and government stimulus programmes could trigger inflation, which makes it a more worrisome economic omen.
Serious investors have in the past dismissed gold as an asset that for the most part just sits there yielding nothing. In many ways, gold is like oil or iron ore or any other commodity people dig out of the ground. Most commodity prices rise and fall in cycles, gaining nothing in value over time.
Owing to its image as a stable store of value when others are shaky, gold has held up better than other commodities, but it still hasn’t been a dynamic investment. Over the past century, the price of gold, adjusted for inflation, has risen by an average of just 1.1 per cent a year, compared with 6.5 per cent for US stocks. Even the 10-year US Treasury bond, considered the most risk free asset in the world, has produced higher annual returns.
Gold has shone mainly in hard luck moments. It surged amid the stagflation of the 1970s, rising more than sevenfold over the course of that decade to peak at $850 in early 1980. It surged again after the global financial crisis of 2008, peaking at $1,900 in 2011, but then it slid backward over much of the subsequent decade.
In 2019, after the Federal Reserve signalled that it was suspending plans to push interest rates higher, gold mounted another ascent. Historically, gold has done best when interest rates fall below the rate of inflation. As the inflation-adjusted return on bonds turns negative, investors feel comfortable owning gold as a store of value, even if it yields nothing.
That is what has been happening over the past few months. With bond yields near zero in the United States and negative in Europe and Japan, investors have driven up the price of gold more than 30 per cent this year after a gain of nearly 20 per cent last year. In recent weeks, that surge has been turbocharged by growing expectations that all the money governments are pumping into their economies will reignite inflation.
In addition, with valuations of stocks well above their long-term average, gold appears relatively cheap. And with central banks printing money hand over fist, some see gold as a stable alternative to the dollar and other major currencies. (Gold is also pulling up the price of its less glamorous relative, silver, which is rising from an unusually depressed level because people see it as a cheaper play on the same trends.)
For gold to keep rallying, expectations of inflation will have to keep rising. Anticipating higher inflation has been a losing bet for a large part of the last four decades, but the odds appear better now. Most nations are doling out record levels of stimulus at a time when forces like globalisation, which kept inflation in check, are weakening. Normally, if inflation looms, central banks can be relied on to raise interest rates, but Fed officials have signalled that they aren’t “thinking about raising rates,” and do not expect to move before 2022.
This is not a healthy turn. When interest rates are this low, money is virtually free, encouraging speculation in assets of no value to society, beyond what the seller can get for them. Gold is the prime example just now. The wider risk is that this kind of purely financial speculation undermines the economy by sucking capital away from industries that will put it to more productive use.
As an investment, gold has none of the virtues I admire, like innovation and dynamism, and many of the vices I despise, including the “rent seeking” mind-set typical of extractive industries. But these times aren’t normal. Unless a vaccine emerges quickly, central banks stop printing money frantically and real interest rates start rising again, it is difficult not to be a gold bug now.
The writer is the chief global strategist at Morgan Stanley Investment Management, the author, most recently, of “The Ten Rules of Successful Nations” .
©2020 The New York Times News Service
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.