Over the past year, while stocks have slid and bonds have sputtered, gold has gained about 5 per cent in U.S. dollar terms and roughly double that in Canadian dollar terms.LEONHARD FOEGER/Reuters
Some people are passionately attracted to gold. Not me.
I’ve never seen much of a case for owning an asset that pays no dividend or yield. As for its historic role in the monetary system, I stand with the great economist John Maynard Keynes, who labelled the gold standard “a barbarous relic” way back in 1924.
But, all that being said, I will admit I’m fascinated by gold right now. Even if you’re as allergic to bullion as I am, it’s worth paying attention to what is happening to the metal because of what it says about the state of market psychology.
Let’s start with the fact that it is beating other assets. Over the past year, while stocks have slid and bonds have sputtered, gold has gained about 5 per cent in U.S. dollar terms and roughly double that in Canadian dollar terms. At midday Friday, it was trading around US$2,000 an ounce, just below its record high of US$2,069 set in 2020.
Why have investors grown so fond of the metal? Despite what many people assert, it’s not because of rising fears of inflation. Over the past year, inflation has faded in both Canada and the United States.
It’s not because of rising recession fears, either. The metal fell last year when fears of an imminent recession were near their peak. It has since ticked steadily upward as the North American economy has proven unexpectedly resilient.
Could gold be climbing simply as a result of people’s desire to diversify away from expensive stocks? Maybe. But its rise in recent months appears to be driven by forces stronger than mere portfolio rebalancing.
It’s rather remarkable, for instance, that gold has managed to advance during this period despite a steady rise in real (that is, after-inflation) interest rates. This is not at all typical.
Gold usually tumbles when real interest rates (and bond yields) go up. There is an excellent reason for this: The bigger the payoff that investors can count on collecting from bonds, the less attractive a zero-yielding asset such as gold becomes.
Except for now, that is. To sum up: Gold has somehow managed to stage a solid advance in recent months despite fading inflation, a resilient economy and rising real interest rates – all things that would ordinarily drag down its price.
The sturdiest explanation for its unlikely ascent is that central banks have suddenly turned into big buyers of the metal. The World Gold Council, an industry association, estimates the amount of gold bought by central banks soared by 152 per cent in 2022, to 1,136 tonnes.
Why the rush to buy? It’s possible that Russia’s invasion of Ukraine marked an enduring shift in attitudes toward gold. In the wake of the invasion in February, 2022, Western governments imposed financial sanctions on Russia and froze many of its central bank’s assets. The sanctions underlined how vulnerable many financial assets are to international prohibitions.
In contrast, gold held within a country’s own borders is far more difficult for Western authorities to police or control. It would be natural for some countries to take note of this distinction and act accordingly. So long as geopolitical stresses are growing, gold will appeal to any government that is worried it might get sideswiped by sanctions. It will also appeal to any country that wants to diversify away from U.S. dollar reserves because of growing tensions between Beijing and Washington.
States in the Middle East were “active buyers” of gold in 2022, the gold council says. Meanwhile, Turkey boosted its official gold reserves by a remarkable 148 tonnes, raising them to a total of 542 tonnes. For its part, the People’s Bank of China bought 62 tonnes, boosting its total bullion reserves above 2,000 tonnes for the first time.
The world’s infatuation with bullion won’t end any time soon, according to the HSBC Reserve Management Trends survey, an annual poll of 83 central banks conducted by Central Banking Publications. More than two-thirds of respondents predicted their peers would increase their gold holdings this year.
Investors are taking note. Analysts at Citigroup wrote last month that they see a 20- to 30-per-cent chance of bullion surging to record highs over the summer. Mom-and-pop investors seem to be thinking similarly: This month, Google searches for “how to buy gold” hit the highest level in nearly 20 years.
Gold bulls seem to be betting that any number of economic shocks – say, a resurgence of inflation, a banking crisis, dramatic cuts to interest rates or new geopolitical tensions – could propel gold prices into uncharted territory.
Here at Curmudgeon Central, I remain skeptical. Gold is not cheap at its current price. In fact, it is roughly 27 per cent more costly than its long-run inflation-adjusted average, according to Bloomberg. So long as real interest rates remain high, there is going to be a steady downward tug on its value.
Still, I intend to keep a close eye on gold’s path. No matter what you think of its prospects, it remains a great guide to the state of global anxiety. Right now, the one unmistakable message it’s sending is that we’re very nervous indeed.