Gold was a little lower this morning after a powerful run of more than two months, but is this just a blip or could the price be on its way down again?
In early trading, bullion lost 1.02% to $1,494.60 a Troy ounce. Despite the decline, it was little changed on its level a month ago when, on 12 August, it traded at $1,501.95.
In the longer view, gold was fairly stable for most of the last five years, with the price moving in a range between $1,055.25 on 18 December 2016 and a high of $1,388.35 on 21 June this year.
As recently as one year ago, on 11 September 2018, the yellow metal was priced at $1,194, but after 21 June this year, it began a decisive breakout above $1,400.
By rights, the feared onset of recession ought to have dampened the gold price, given it is an asset that performs much better in the inflation-prone climate of an economic boom. But geopolitical tensions and continued loose monetary policies in much of the developed world have rendered the old rules less relevant.
According to the industry body, the World Gold Council, it was recession fears that prompted central banks to consider further loosening of monetary policy that pushed the returns on bonds ever-lower and prompted investors into other assets, including bullion.
In the first half of this year, it said, gold was one of the best performing assets. It produced a 10.16% return against one of 5.18% on US Treasury bills.
Looking forward, the council said:
The council added that weaker economic growth “may soften consumer demand near-term, but structural economic reforms in India and China will likely support long-term demand”.
The sharp price rise in June, the council said, was driven by a mixture of declining interest rates, a greater willingness to take investment risks and general price momentum.
Don’t forget inflation
On 10 September, the Financial Times reported that Citigroup has suggested that the price to go through $2,000 an ounce “as US economic growth fades, uncertainty surrounds the outcome of the US presidential election and the country’s central bank, the Federal Reserve, further loosens monetary policy.
Furthermore, central banks have bought more gold this year than at any time during the past nine years, the report said.
On paper, $2,000 an ounce would be a record price. But gold is priced in the US dollar, which, like any national currency, is prone to inflation.
Once this is taken into account, even $2,000 an ounce would be nowhere near the level seen in January 1980, when the Iranian hostage crisis, roaring inflation and rising east-west tensions propelled the price to somewhere over $800 an ounce, which would be about $9,000 an ounce in today’s values.
Looked at one way, such high rises simply reflect the price inflation of a commodity, no different from oil or wheat. But given gold is a monetary asset, it can be seen also as the dollar being devalued against gold, as it can be against any currency.