All that glitters isn't gold
25 July 2021
What this chart shows The chart shows the discrete monthly performance of gold year-to-date. In June gold suffered its largest monthly drop since November 2016. Gold prices surpassed $2,000 per ounce for the first time in history in August 2020 amidst concerns about the impact of Covid-19 on the global economy. Gold does not produce an income and so in more ‘normal’ times – when interest rates might be higher - a saver looking to earn a positive yield would be unlikely to view gold as an attractive asset.
The perceived safe-haven status of the precious metal is one reason why many found it very attractive last year. Since vaccination programmes have been rolled out in most major developed economies, the appeal of the yellow metal has been dented as investors have grown more optimistic about the economic recovery. Why this chart is relevant Gold has struggled at times this year with periods of rising real bond yields and against a buoyant Dollar following hawkish remarks from Fed officials indicating an increased likelihood of interest rate rises in 2023. Physical gold typically suffers when real yields rise as it does not offer a yield to investors, and as yields rise the opportunity cost of owning non-income bearing assets increases.
Recent US employment data has been strong, as have lead indicators for growth including PMIs. On one hand this underpins a positive economic backdrop which could see limited demand for safe-haven assets such as gold. However, US consumer inflation hit 5.4% in June, its highest level in 13 years, and investors might look to gold as one way to protect against these high levels of inflation.
Source: Bloomberg Finance L.P., Momentum Global Investment Management
Research Date: July 2021
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