Gold is no longer a good hedge against bad times

THOSE who remember or read about the 1980s may consider the price of gold to be a highly dramatic variable. During the post-war Bretton Woods years, the price of gold was pegged at US$35 an ounce, but after Richard Nixon severed the US dollar’s final link to gold in 1971, prices soared to more than US$800 an ounce by 1980. Fortunes were made, gold bugs proliferated and the price of the precious metal became a daily fascination. Many commentators considered the high price of gold to be a harbinger of disaster for both fiat currency and Western civilisation.

Even if it is trading around a record high of US$2,000 these days, gold is a little boring and likely to remain so for the foreseeable future. According to a new study from the National Bureau of Economic Research, gold prices have followed some fairly standard principles since at least 1990. To put it simply, gold prices decline when real interest rates rise. That is because gold itself has zero direct yield, so at higher interest rates the opportunity cost of holding gold goes up. In this regard, gold is like many other assets, including crypto, tech companies and real estate.

The price of gold also goes up (down) when demand for it as a commodity goes up (down). So, if say, China becomes a major global economic power, the Chinese economy will need more gold, if only for its commodity uses, and that in turn will boost gold prices, as it did starting in 2002. There is also sizeable gold jewelry demand from India, so as that country becomes wealthier, that too will boost the demand for gold and thus its price.