June 4, 2021
After hitting an all-time peak above US$2,000 in August 2020, gold has traced a less glittering path over recent months, taking a decisive leg down since the beginning of the year. With Covid-19 vaccine programs firmly in the picture, albeit with differentiation in the pace of the rollout between countries, we believe the market narrative has shifted to the overriding themes of rising real-bond yields and the potential emergence of inflation as the recovery takes hold. This has been coupled with a more reflationary tone in equity markets, and while industrial commodities, such as copper, have surged ahead anticipating a full-blown recovery, in our view gold has been left behind, perhaps unsurprisingly given its countercyclical rather than pro-cyclical characteristics.
This is a delicate juncture in terms of prospects for the gold price. The jury is out as to how far and fast real rates can rise – high levels of indebtedness may well place a cap on yield rises – and while short-term inflation seems an inevitability owing to base-rate effects, it is unclear how sustained inflationary pressures will be. Moreover, the US-dollar appreciation witnessed since the beginning of the year could be unhelpful for the gold price, particularly if coupled with rising real yields.
We believe a rosier scenario for the precious metal would be the emergence of broader inflationary pressures owing to a combination of input-price appreciation, a build-up of capacity constraints within industries, and true wage growth. Should the playbook of 2002-2007 unfold, steadily rising inflation could keep real yields in check, paving the way for gold to deliver a creditable performance. On the flip side, in the event that rising yields continue to dominate, in conjunction with a strengthening US dollar, we believe that would present a more challenging environment for the precious metal.
Catherine Doyle, investment specialist, Real Return team, Newton Investment Management