Bullion sceptics may be furious, but gold is riding high as the world heads into what is predicted to be the most severe recession since the Thirties.
For years, they have rejected claims from fans of gold investment that the yellow metal can protect personal wealth against the ravages of both an inflationary boom and a punishing downswing.
This kind of talk, they say, is more akin to the implausible beliefs of a religious cult than to serious thinking about financial markets. At its best, they argue, gold can hedge against inflation in the US dollar, the currency in which it is priced.
Dollar relationship suspended
At its worst, it is not really any sort of monetary asset, rather it is a commodity with various applications, from dentistry to jewellery.
But for now, bullion’s fans are having the best of the argument. The price was a little lower in trading this morning, down 0.38% at $1,678.60 an ounce.
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This, however, was considerably higher on the month – on 23 March, it changed hands at $1,494.50. Three months ago, on 22 January, the price was somewhere between the two, at $1,558.10, and 12 months in the past, on 23 April, it traded at $1,273.45.
As has been notable recently, the traditional relationship between gold and the dollar – that what is good for one is bad for the other and vice versa – seems to have been suspended. The US currency has had a reasonable 12 months, rising against the euro from €0.8883 on 22 April 2019 to €0.9211.
The big difference between the performance of these two safe-haven assets is that gold’s progress has been fairly steady, with the 12-monthly low being seen back on 2 May 2019 at $1,271.45 and the high a few days ago, on 16 April, at $1,717.85. By contrast, both the high and low of the dollar were bunched into last month, the low of €0.8734 on 9 March and the high of €0.9379 on 19 March.
Parallel with the Seventies
Bullion sceptics may take some comfort from the fact that special factors are helping to support the price, factors that would not be present in a conventional recession. This downswing, while it may have been likely to occur anyway, has been accelerated by the official response across most of the world to the coronavirus.
This, in turn, has led to huge monetary and fiscal stimulus measures in many countries, including the US and UK, including near-zero interest rates. These measures reduce the attraction of paper currencies and burnishes that of gold.
Perhaps the closest parallel is not with the Great Recession that started in 2008, but with the “stagflation” of the Seventies, in which economic stagnation combined with high inflation. During that decade, the price of gold rose from about $40 an ounce to about $800.