Why gold has been such a bad investment so far this year

Poor old gold – beaten up, mocked, ignored and loathed. And yet it’s still there. It always will be there.

You can beat it up as much as you like. You can beat it into a layer of film barely an atom thick. But there is one thing you can’t do to this most malleable of metals and that is destroy it. It is permanent.

And yet gold’s performance in 2021 has been anything but golden.

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Gold is an analogue asset in a digital world

Gold began the year at around $1,950 an ounce. Here we are, barely two months in, and nearly $250 lower. This is a bear market of the old-school grinding variety. The safe haven is anything but safe. Gold has been so bad even the pound is outperforming it. So has the euro, the US dollar, heck, even the Turkish lira.

Do you know what gold’s biggest problem is? It isn’t rising bond yields – yes, that has driven the price of gold lower these past couple of months – but in the longer term, the issue is digital technology. Future historians may come to describe the era we are going through as the Digital Revolution. In the last 30 years, the growth of the digital economy has eclipsed pretty much anything the physical economy has had to offer.

The internet, computers, smartphones, social media, video, music, photography, e-publishing, e-commerce, e-finance. Even money itself has gone digital – only around 2%-3% of the money in the world actually exists in physical cash form. Digital debt has even pushed up the value of real estate and other financial assets.

Today’s value is in digital assets – trademarks, intellectual property, data, shares in tech stocks, bitcoin. The analogue economy has seen growth, but nothing like the growth of digital. Mines, farms, old school retail are dogs compared to the unicorns of Silicon Valley and Seattle. And gold is the most analogue, physical asset of the lot.

Why do we even need it, now we have “gold 2.0” – digital gold in the form of bitcoin, I wonder? The market seems to agree. While gold has seen $12bn of outflow, bitcoin has seen $6bn of inflow. Bitcoin’s technology is better; its marketing is better; countless millionaires and billionaires are parading their rapidly-found wealth, discovered thanks to this new religion. An endless supply of memes.

An army of coders, investors, communicators and more, perfectly adapted to this new digital world, all acting voluntarily, like the armies of the early Roman Republic, united by the shared goal of the untold wealth that bitcoin at $100,000 or $1,000,000 will bring. Its network effect is like nothing else.

Gold is losing the narrative game

Goldbugs, meanwhile, don’t even know what a meme is. The World Gold Council, plump, stolid and bereft of imagination, stares at this new movement in baffled incomprehension, then goes off for an expensive lunch, paid for by a business model that benefits it, but no one else. It does not stop to ask itself why Elon Musk is tweeting about dogecoin, yet not about gold.

Gold is the most alluring substance on earth, yet it has been incapable of making itself alluring. In the bull market of the 2000s, gold saw innovation. There was the invention of the gold exchange traded fund (ETF) which brought billions of institutional money into the metal. There were the likes of Goldmoney, Bullionvault and Goldcore, which brought gold to retail investors.

There has been innovation today: the Glint gold credit card; Mené’s 24-carat gold jewellery; the Totenpass digital storage pass; a plethora of gold-backed crypto-coins that nobody cares about. But it has been an uphill battle for all of them; there is no coordinated network.

I spoke to my old buddy, analyst Ross Norman, last night. For many years he was the top forecaster for the London Bullion Market Association (LBMA). “Neither central banks nor the institutional investor have been buying,” he says. “In fact, the latter has been baling. So two key drivers of the market last year have gone.” There are some positives, however. “Gold is trading at a premium in China. That physical demand will support the market.”

Norman continues: “We have rising bond yields indicating inflation is there, but when we start to see real data that ‘proves’ it, that will help gold. I’ve always said this year would be a game of two halves. Weakness in the first part of the year, but in the second half, as we see evidence of inflation coming through, gold will be stronger. So I’m comfortable in my prediction of an average price of just $2,000 for the year with highs around $2,300.” That would be some turnaround from here. He agrees. A weaker dollar will help.

Trends don’t go on forever, but they can go on or a lot longer that people expect. A perfect trend sees the price above the short-term moving average, then the medium term, then the long term. Technical analysts call this golden alignment – all are sloping up. Gold has this but in opposite. The price is below the short-term moving average, which is below the medium term, which is beneath the long term. It’s as bad as it gets.

I still own gold - I always will. I own gold miners; I’m a gold bug. A bounce here from oversold levels is likely, but the trend is down. Unless gold can adapt itself to the realities of the digital economy, and thereby make itself alluring again, it will continue to lose relevance. That it was once used as money is no longer enough. We remain below the highs of 2011.

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