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Losing its shine ?
For much of last year , gold did its job . As a global crisis mounted , the price of the yellow metal rose from just under $ 1,600 to more than $ 2,000 per ounce , appearing to act as a hedge against the volatility in equity markets and the threat of imminent economic collapse . However , from July 2020 onwards , it began to fall , and is still down by more than 10 % from its peak . Considering this came against a backdrop of ongoing uncertainty around Covid and mounting inflationary pressures , which should have played to its strengths , this raises the question : why did it stop working ? Adrian Ash , head of research at BullionVault , says : “ Lots of people are scratching their head about the performance of gold last year . It ’ s often painted as an inflation hedge , so why did it not perform better ? The reality is that gold is not a perfect inflation hedge . Gold can protect against inflation , but the real kicker is interest rates .” Data from The World Gold Council shows that only 16 % of the variation in gold prices over the past 50 years can be explained by changes in CPI inflation . The late 1970s and early 1980s saw both strong gold returns and extremely high inflation , but this relationship has not been repeated since then . There was a short period when inflation ran high and gold returns were strong – from late 2007 to early 2008 – but correlation doesn ’ t automatically equal causation . As such , gold ’ s reputation as an inflation hedge may have been over-played . Real interest rates ( interest rates adjusted for inflation ) are a far more important driver of the gold price . Gold has no income , therefore the opportunity cost of holding it increases in line with interest rates . Ash says : “ For a good period of time , it has been a store of value against cash . If cash in the bank is losing money in real terms , gold is appealing .”
Sell the rumour … To add another layer of complexity , movements in the gold price are often
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