Wednesday, September 30, 2020

Gold’s Record High Gives New Life to Dollar Doomsayers

Gazimal | The Image Bank | Getty Images 

This year ranks as one of the best on record for investors in the precious metal, with futures prices up almost 24% for 2020

Can gold keep going?

This year ranks as one of the best on record for investors in the precious metal, with futures prices up almost 24% for 2020 after hitting an all-time high in August.

Though gold’s detractors through the ages are numerous and prominent, including the likes of Warren Buffett and John Bogle, the events of this year are giving new life to those who insist the arc of financial history points toward the inevitable debasement of currencies like the dollar. Bullish investors contend that trend means new highs for gold are in store.

Gold has been a prime beneficiary of the Federal Reserve’s determination to leave borrowing costs at historically low levels to spur the economy after the shock of Covid-19. Chairman Jerome Powell formalized that stance in August, saying the central bank had dropped its longstanding practice of pre-emptively raising rates to head off higher inflation.

The prospect of the Fed pinning interest rates near zero for years to come and allowing inflation to run hot helped pull so-called real yields into negative territory. This means investors expect to lose money, after accounting for inflation, if they buy 10-year U.S. Treasurys and hold them until maturity.

In such an environment, money managers say the precious metal has lived up to its status as a haven, shielding investors in a year when stocks have been racked by volatility.

 “[Gold] has thousands of years of a track record of offering some form of protection against the unexpected,” said George Milling-Stanley, chief gold

strategist at State Street Global Advisors. “That’s worth having.”

For decades after Paul Volcker’s Fed raised interest rates to tame inflation in the early 1980s, boosting real yields, the fact that gold paid no dividend or coupon counted against it. Now, with real yields on government bonds back below zero, gold’s lack of income isn’t such a drawback.

The metal’s price surpassed $2,000 a troy ounce for the first time ever this quarter, a milestone in a bull market that some say began in 2015 and climbed to giddy heights after Covid-19 kneecapped the world economy this spring. Gold has room to keep rising, some say.

The price would have to climb another 43% from its late-August level, crossing $2,800 an ounce, to top its peak from early 1980, after adjusting for rising consumer prices in the four decades since then. Fueled by runaway inflation, the Iranian hostage crisis and the Soviet Union’s invasion of Afghanistan, prices crested at $850 in the London market on Jan. 21, 1980. That remains their all-time high in inflation-adjusted terms.

Moves in real yields explain 72% of swings in the gold price over the past 12 months, according to analysis by Michael Sneyd, head of macro quantitative and derivative strategy at BNP Paribas. Changes in inflation expectations accounted for another 21%.

Sliding yields have given bullion, which is denominated in dollars, an additional boost by denting the U.S. currency. The WSJ Dollar Index, which tracks the greenback against several other currencies, fell for five straight months through August. Though the dollar has since strengthened, gold bulls say pressure is bound to intensify.

The greenback’s role as the world’s reserve currency is being called into question by some gold bulls, including analysts at Goldman Sachs Group. Gold is the currency of last resort, especially when governments are debasing fiat currencies and pushing real interest rates to record lows, the analysts wrote in July.

Bond yields have burnished gold in another way. Since yields move inversely to prices, the fact they are so low means Treasurys are unusually expensive. Many money managers worry government bonds, traditionally owned as a buffer, won’t have much headroom to rise if stocks take another tumble.

Investors like Michael Kelly, global head of multiasset at PineBridge Investments, are on the hunt for other assets that zig when stocks zag. “This is crystal clear: Financial repression is coming even to the U.S. and the U.K. and there will be negative real rates as far as the eye can see,” Mr. Kelly said. “That supercharges gold.”

Gold has done a good job at smoothing out returns in recent decades, according to Hilary Till, principal at Premia Research LLC, who thinks money managers should consider investing in bullion as a counterweight to stocks.

Take a hypothetical fund that invested 30% in a basket of stocks tracking the S&P 500 index, 30% in gold futures and 40% in 10-year Treasurys at the end of 1999. This portfolio earned compound total returns of 7.2% a year through 2019, Ms. Till calculates. Its worst result was to lose 2.3% in 2015. In contrast, a portfolio with 60% stocks and 40% bonds earned 6.6% a year and shed 14% in 2008.

For others, however, many of the arguments made in favor of investing in gold don’t stand up to scrutiny.

This year’s surge in prices of the precious metal coincided with a rush of speculative trading in derivatives and shares of companies with little or no record of making profits. Gold’s advance is another symptom of risk-taking encouraged by lavish economic stimulus and enabled by easy access to financial markets for inexperienced traders, skeptics suggest.

“It’s still mostly speculation,” said Simon Mikhailovich, co-founder of the Bullion Reserve. “To me, that’s not the point of owning gold.”

Investors are seeking exposure to gold prices through financial products such as exchange-traded funds rather than direct ownership of gold, which is the ultimate haven because it sits outside the financial system, Mr. Mikhailovich added.

Exchange-traded funds backed by gold, which allow investors to bet on bullion prices with the ease of buying a stock, have become wildly popular. Investors poured money into the funds for the ninth straight month in August, according to the World Gold Council. ETFs now sit on a hoard of gold weighing 3,824.05 metric tons, more than any central bank other than the Fed.

There is no evidence that gold acts as a reliable hedge against inflation over time periods other than those spanning centuries, said Campbell Harvey, a finance professor at Duke University, citing a 2013 paper that he co-wrote. Nor has the idea of owning bullion in case the U.S. government defaults made sense since President Nixon ended the convertibility of dollars into gold in 1971, according to Prof. Harvey.

“This is basically a speculative situation,” he said. “Gold is no different from equities or cryptocurrencies.”

Write to Joe Wallace at


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