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Gold Price Tops $1,500

19 August 2019   |  

Consider first this headline—Gold Price Tops $1,500—and then consider this combination of recent events:

  • The global trade spat between the US and China (and others—though most other players are much smaller in terms of economic heft)
  • Over a decade of extraordinary global monetary policy—including most major central banks’ recent turn back toward accommodative stances
  • Related to monetary policy, the growing number of countries in which negative interest rates persist
  • Also related to monetary policy, the recent inversions of prominent yield curves—including the US’s
  • Signs of some economic slowing—particularly in the euro zone and China
  • Uncertainty around the UK’s ultimate Brexit fate
  • An uptick in market volatility 

Understandably, investors’ nerves are on edge—this list contains just a sampling of factors often cited as potential causes of bear markets and/or recessions. Such times in markets often prompt “flights to safety”—which ostensibly are securities that should hold up better than the majority during a downturn. Gold is often viewed as one such haven, with recent headlines touting its recent rise. And, sure, the rise has been pretty sharp since the end of May (Exhibit 1).

Exhibit 1: Gold Price in USD, 31 May 2019 – Present

Source: Bloomberg, as of 19 Aug 2019. Past performance does not guarantee and is not a reliable indicator of future results.

 

So where does gold go from here? And what can it tell us about overall health of equity markets? The short answers being 1) not sure and 2) not much. First, to state the obvious, to capitalize on gold’s recent rise, you’d need a time machine back to early 2019. If that seems flippant, consider how critical it is to precisely time gold’s sharp rises to glean any benefit from owning it. Just look at what gold has done since 1980 (Exhibit 2).

Exhibit 2: Gold Price in USD, 1980 – Present

Source: Bloomberg, as of 19 Aug 2019. Past performance does not guarantee and is not a reliable indicator of future results.

 

Though the massive rise from late-2005 through 2011 or so is pretty eye-popping, the reality is that’s one (albeit sizeable) run over the last almost 40 years. Other than that massive rise, gold has basically done nothing.

It also puts the current run in sharp relief.

Consider this relative to equities (Exhibit 3)—which actually represent an ownership share of something that is earning a return and is predicated on human ingenuity and innovation, rather than other humans’ particular emotions about a shiny metal object and its perceived safety. Which means where gold goes from here is likely more tied to short-term jitters about economic direction, and there’s not much investors in anything other than the commodity itself can learn from past or even future movements.

Exhibit 3: MSCI EAFE Index and S&P 500 Total Returns and Gold Prices, Indexed to 1 as of 31 Dec 1980

Source: Bloomberg, as of 19 Aug 2019. Past performance does not guarantee and is not a reliable indicator of future results.

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