Why is gold having such a miserable time and when will it turn around?

Oh, for those sunny days in August when gold’s rise seemed inexorable. New highs came every day and two thousand bucks per ounce was a thing gold bugs looked down on, not up to. Here we are in March (always a bad month for gold) and we can’t get above $1,700.

The sun may be shining, but – no doubt to the surprise of ancient cults who felt one was the teardrops of the other – gold is in an inexorable downtrend.

What’s the reason – rising bond yields, the rising US dollar, the fact that bitcoin has stolen gold’s thunder? Does it even matter why? It’s going down – that’s all you need to know. “When does it start going up again?” is the question..

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Hopes for a strong economic recovery are hurting gold – for now

April is usually a good month for gold. We are currently re-testing the lows of early March. Maybe they hold and we get a little bit of a rally over the next month. It’s not like gold isn’t oversold.

Then again, May is not usually a good month; June is the month that those in the know tend to make their annual gold purchases. Is that when gold makes its final low? That’s my guess.

You know my theory: gold is an analogue asset in a digital world. Digital is where all the growth is. Digital is where all the innovation is. The digital economy has left the physical economy for dead.

But there has been something of a turn of late. The Great Rotation, they are calling it. Clever money is abandoning growth (digital) in favour of value (physical). Maybe some of that clever money will see extraordinary value in gold. It’s not like the value isn’t there.

When you buy gold, you don’t get a yield – it pays no interest – you get storage costs. So if bond yields are rising, money that would otherwise have gone to gold (in the event that yields were flat or falling) goes to bonds instead. There’s even an opportunity cost to holding gold. Ergo rising yields are bad for gold.

For whatever reason – perhaps because it takes ten years to take a mine from discovery through to production – gold and ten-year bond yields tend to correlate in a way that is much more apparent than with shorter-term interest rates.

As we know the ten-year yield is rising, and thus gold pukes. However, there is a silver lining, forgive the pun, to all this. Rising yields suggest that somebody somewhere sees a strong economy ahead.

Despite the continued negativity in the press around Covid-19, and the reluctance of our glorious leaders to let you do anything that is tantamount to leading a normal life, markets do seem to be anticipating that the pandemic is entering its final stages.

Perhaps it’s the vaccine roll-out, perhaps its exhaustion – but the “Back to Work, Back to Normal” trade is on. Try booking a table in a restaurant if you don’t believe me. There is a lot of pent-up demand for getting out of the house – whether it’s going to the pub, going to a restaurant or going on holiday. These are all “physical economy” things. As we have mentioned, household savings in the UK and North America are at record highs. There’s a lot of dough waiting to be spent on real life.

Rising yields confirm the theory. Rising yields indicate an expectation of economic strength. A strong economy gives rise to inflation. Gold is the de facto hedge against inflation. In the long term then, these rising yields are good for gold. You wouldn’t know looking at the price at the moment, but the stage is being set for a gold price rally later in the year – but we are not there yet. That’s my theory.

A lot of that newly-printed money is sitting in the hands of real people, waiting to go into the real economy. Covid has hit globalisation – we are going to benefit less from China’s cheap labour costs, and pay higher local rates. So it is going to get that much harder to mask the inflation.

The US dollar is getting stronger

We have addressed the physical/digital issue. We have addressed the rising yields issue. Now we turn our head to the third and final piece of the jigsaw: the US dollar.

A rising US dollar is not good for gold. Well, yes and no. It’s another one of those, “short-term bad but not necessarily long-term bad” issues. There have been plenty of occasions in the past when the two have risen together, though on the whole, yes, a falling dollar is better for gold than one that’s rising.

The dollar was awful in 2020, with the dollar index (a measure of the dollar against a basket of other major currencies) falling from 104 at the peak of the Covid crisis to 89 around the turn of the year. There is a lot of long-term support in that 88-89 area and, many times in the past, it has proved a turning point. As technical analysts might say, there is a lot of price memory there.

The US dollar is now in an uptrend. How long does this remain the case? Currently at 93, it’s looking hot, so much so that we might get a little bit of a pull back (giving us our April rally in gold). But looking at a longer-term horizon I think it goes higher. There is resistance in the 94-95 area. If it gets above that and goes towards 100 it will get very painful for the gold bugs.

I’m not quite sure what to make of the dollar, I must say. No doubt it will all look obvious in retrospect – it always does. But for now all I can really say is “uptrend”. I guess that’s all one needs to know: it’s going up.

But I think there is something to my roadmap for gold. A rally from oversold levels in April, declines in May, followed by longer-term lows in June. But when, or should I say if, the inflation cat is out of the bag, gold will have its day again.

Bottom line: it’s a bear market. You get tradable rallies in a bear market, but a bear market is a bear market. They can go on for longer than you think. They can “make no sense”. But they don’t go on forever.

Not yet, then. But soon, my pretties.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.