Gold in a Time of Inflation: How Has it Actually Performed?

FX Empire interview with Giles Coghlan, Chief Market Analyst, HYCM

Has the story often told about gold and its role in an investor’s portfolio changed since the pandemic?

That’s a good question to start with. Today, narratives drive markets much more than any time in the past; some would say even more than the fundamentals. Gold has had a tough time over the last couple of years as it has lacked a clear, compelling story to drive prices. It broke its 2011 highs in August of 2020, back when there was still a great deal of uncertainty surrounding the pandemic as well as the earliest of inflationary fears.

When those concerns were pacified by a historic bull market in risk assets, gold retreated from the headlines, and spent the next two years shedding around 20% of its value as you might have expected, given those underlying market conditions. But when real signs of inflation did start showing up in the commodity markets, gold had already peaked and showed no convincing signs that higher-highs were in store for the asset.

Copper and aluminium, for example, continued rallying for the next year and a half following the August 2020 peak. That’s when the narrative began to change, and you started hearing new versions of the “barbarous relic” argument, with bitcoin in the spotlight as a new kind of gold for the digital age. The question some were asking was, ‘has Bitcoin replaced gold as an inflation hedge?’

What do you make of that narrative?

Well, it was falsified by the way bitcoin actually performed, which was much more like a risk asset than an inflation hedge. And don’t forget how correlated crypto has been with the Nasdaq since at least the pandemic. This has led to a situation where the market has moved beyond both gold and bitcoin being straight safe havens and inflation hedges.

This, quite interestingly, leaves just the US dollar, which makes sense as a safe haven but perhaps not so much as an inflation hedge. Being the world’s reserve currency, it makes sense to see the USD gain on flights to safety.

Do you think this change in the way investors view gold is warranted? Or do you think gold still has an important part to play in a modern portfolio?

It’s been fascinating hearing renowned investors from all over the macro spectrum shrugging their shoulders when asked about gold’s performance over the past year or two. I think this is largely because the path ahead seems so unclear at the moment, with many risks lurking in the shadows.

But I don’t think that thousands of years of human societies storing value in this rare precious metal can change from one market cycle to the next. One very important relationship to note is that of real yields and the USD. When they both move lower in tandem that usually lifts gold. With the USD and real yields both gaining at the moment it is perhaps unsurprising to see gold falling.

HYCM has a very long history of brokering gold trades and it is one of its top traded instruments. HYCM’s client base is truly global and the market commentary tends to orbit around US monetary policy because it is so central to the global economy. The USD heavily influences the path of the gold, yet gold has outperformed sterling since the beginning of 2021, and has been trading at or around that August 2020 peak since March of this year.

The story is even more bullish for gold if your money has been in euros. Gold is up more than 20% against the euro since early 2021. In March of this year, it set a new high against the single currency that’s almost 10% higher than the August 2020 peak.

So, as you can see, the currency you’re trading in dictates a different story about what gold actually does for a portfolio during inflationary times. It may also be that traders in the regions where HYCM operates have a longer history of trading FX and commodities when compared to their US counterparts, who until recent years have primarily been stock traders.

Finally, how do you see the way investors view gold versus bitcoin changing?

I think bitcoin is too new, so whatever we say about it right now, its price action will probably confound our expectations on both the upside and downside. If gold is having a bit of PR trouble at the moment, bitcoin hasn’t truly established what it is in the minds of the global investment community. But I do think both will play a part, I just wouldn’t presume to say what that is or to assume appropriate portfolio weightings.

What I will say, though, is that the negative sentiment surrounding both asset classes at the moment is probably the most bullish thing about them. They also share the fact that they have both recently been trading below their previous cycle highs, which would ordinarily be a dip-buying opportunity for both short-term traders and long-term investors. The uncertainty of the current moment and the path ahead is partly what’s holding these assets back.

Where bitcoin is concerned, I think it’s likely to undergo another change in narrative over the next few years. As more of the large-cap crypto names move to Proof-of-Stake, bitcoin could reemerge as a highly trusted, borderless form of collateral for the very reason that it actually derives its value from activities in the real world.

As far as gold is concerned, I think the long timeframes at which gold operates are what’s currently most confusing to market participants who have been conditioned to incredibly short-term thinking. On a long enough timeline, I think gold still does what it’s always done, and will continue to do so.

If you want to learn more about how to invest in gold and what opportunities exist leading towards year-end, then please attend HYCM’s seminar, Investing in FX, Stocks & Gold In A High Inflation Era, on the 29^th of September at the Shangri-La hotel in Dubai. More information will be soon available on the HYCM website.

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