In the decade of 2000s (2001 to 2010), gold gave superlative returns. The prices of yellow metal increased 3.8x (in USD terms) for the decade. This return had however come on the back of the negative returns for two successive decades (1981-1990 and 1991-2000). In the last decade (2011-2020) the precious metal yielded a return of 39%.
Traditionally it was
believed that during periods of high inflation, geopolitical uncertainties,
war, money debasement (due to quantitative easing or hyperinflation) etc. gold is
a preferred refuge. However, this safe haven status of gold appears to have
diminished in the latest episode of high global inflation, unprecedented
quantitative easing, and geopolitical uncertainties.
The shortages of goods and
skilled workers are troubling the global economy. Unprecedented borrowing and printing
of currencies by the US Federal Reserve, Bank of Japan, and European Central
Bank has eroded peoples’ trust in official currencies to some extent. As per
the conventional wisdom, the situation is quite ripe for a super bull market in
Gold. However, so far gold has not witnessed any extraordinary interest.
Rather, independent digital assets (popularly known as cryptocurrencies and
NFTs) have mushroomed world over to fill the trust vacuum. The new age
investors have even preferred equities to hedge against debt and inflation
rather than gold.
So far, the movement in gold
appears to be driven more by technical trade rather than any fear psychosis,
refuge seeking or hedging against risk of large scale war, hyperinflation, or
money debasement due to excessive and/or unsustainable debt.
Despite the massive
volatility in the exchange rate of Russian Ruble, Shutdown of Russian markets,
sanctions on many large Russian global energy corporations, and freezing of
billions of dollars in Russian foreign assets, the gold is higher by -11% YTD
2022 in international markets. This is in sharp contrast to the crisis in
peripheral Europe (Greece, Iceland, Portugal) in 2011. The prospective default
of Greece was less than US$50bn, but gold had spiked more than 30% higher in
2011.
The opinion of market
participants is vertically divided on the prospects of an imminent gold bull
market similar to the 1970s and 2000s. But I would like to draw attention of
the readers to following points:
·
Gold
traditionally been a refuge in the periods of crisis, but in recent years the
preference for gold has been diminishing.
·
During the
decade of 1970s (1971-1980), significant turmoil was witnessed in the global
economy. That was perhaps the best decade ever for gold prices. The gold prices
recorded an increase of 9x in that decade. But most of that increase came in the
last two years of the decade when global crude prices witnessed a sharp
increase. In the following two years (1981-1982) the gold gave up 2/3rd
of these gains.
·
During the
decade of 2000s (2001-2010) the gold prices increased 3.8x as the world struggled
with an unprecedented financial crisis. But most of the gains came in last two
years of the decade (2009-2010); and almost the entire crisis time gains were
given up in the next five years. Again the rise in gold prices coincided with
the sharp spurt in oil prices.
·
Gold has
gained about 39% in the decade of 2010s (2011-2020). But ~75% of the gains have
come in just 9 months of 2020 when the world was shut down due to the pandemic.
·
The Gold
has lost ~11% in the current decade.
·
The gold
has shown strong correlation with the oil prices; though correlation with USD
and Copper has weakened in recent years. Given the global trend towards clean
energy, it is possible that the relevance of gold as a safe haven also
diminishes with the use of fossil fuels.
Thus, it could be reasonably assumed that gold continues to be one of the safe havens but much less volatility. The risk reward profile of gold is definitely worsening with the time.
I continue to maintain my stance on Gold. In my view, a new global order will definitely emerge out of the pandemic and subsequent geopolitical events. The new order will address sustainability and equity issues. Gold will not be a key component of the new order. USD may retain its dominance but it shall face serious challenges from other currencies, including the digital currencies.
You may read in detail here:
Bretton Wood is not about Gold
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