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Daily Brief - What is wrong with gold? (Jan 10, 2022)

Inflation is surging, central-bank money-printing is off the charts, and political tensions globally are intensifying. It’s an absolute dream scenario for gold bugs.


And yet … gold sucks. While inflation has been making new highs, the gold price has actually been declining.


What’s going on?


Not exciting enough


Economists polled by FactSet anticipate inflation to rise at 7.1 per cent year-on-year when the Bureau of Labor Statistics releases its report on Wednesday. This is a 40-year high, and the biggest annual increase since February 1982. A month earlier, in November, consumer prices were up 6.8 per cent on an annual basis.


And yet, after the initial rise gold simply can’t seem to move higher. There are at least two reasons why we haven’t seen a gold rush to match the hand wringing over inflation.


For conventional investors, valuing gold poses a problem. The precious metal does not generate a stream of income.


Gold’s status as the final line of defence against currency mismanagement is also being contested. Cryptocurrencies, particularly bitcoin, are increasingly found in more mainstream portfolios. The asset class was once too small to dent the appetite for gold. Now bitcoin and ether have a combined market capitalization of around $1.3 trillion, around a tenth of the perhaps $12 trillion of gold holdings.


Cryptocurrencies don’t pay dividends, either, but they do offer a much higher level of volatility and therefore potential trading gains (or losses …) Over the past five years the gold price has moved by an average of 0.6% a day. In contrast, bitcoin moves more than 6 times as much in a single day.


On the other hand, gold could be right


There are few financial relationships that have held as reliably as that between the price of gold and the yield on inflation-protected Treasuries (aka TIPS). The lower real, safe yields are, the greater the appeal for the zero-yielding gold.


Despite all the hoopla over inflation fears, the real yields on 10-year TIPS have started the year at -1.06%, and finished it at -1.04%. Taken literally, what TIPS may be saying is that either inflation is temporary or the Fed will bring nominal rates high enough to offset any inflation rise. Either way, not much to see here.


Gold investors appear to agree: keep calm and carry on!