With the gold price trending lower in recent months, we assess the outlook for the precious metal.
- Gold has been left behind as the narrative has shifted to the overriding themes of rising real bond yields and the potential emergence of inflation as the recovery takes hold.
- We believe gold is now at a delicate juncture. Steadily rising inflation could keep real yields in check, paving the way for gold to deliver a creditable performance. But a rising-yield environment combined with a strengthening US dollar would present a more challenging environment for the precious metal.
- Bitcoin and other cryptocurrencies could also affect demand for their more glittering rival.
After hitting an all-time peak above US$2,000 in August 2020, gold has traced a less glittering path over recent months, taking a decisive leg down since the beginning of the year. With Covid-19 vaccine programs firmly in the picture, albeit with differentiation in the pace of the rollout between countries, the market narrative has shifted to the overriding themes of rising real bond yields and the potential emergence of inflation as the recovery takes hold. This has been coupled with a more reflationary tone in equity markets, and while industrial commodities, such as copper, have surged ahead anticipating a full-blown recovery, gold has been left behind, perhaps unsurprisingly given its countercyclical rather than pro-cyclical characteristics.
We believe this is a delicate juncture in terms of prospects for the gold price. The jury is out as to how far and fast real rates can rise – high levels of indebtedness may well place a cap on yield rises – and while short-term inflation seems an inevitability owing to base-rate effects, it is unclear how sustained inflationary pressures will be. Moreover, the US-dollar appreciation witnessed since the beginning of the year could be unhelpful for the gold price, particularly if coupled with rising real yields.
A more rosy scenario for the precious metal would be the emergence of broader inflationary pressures owing to a combination of input-price appreciation, a build-up of capacity constraints within industries, and true wage growth. Should the playbook of 2002-2007 unfold, steadily rising inflation could keep real yields in check, paving the way for gold to deliver a creditable performance. On the flip side, in the event that rising yields continue to dominate, in conjunction with a strengthening US dollar, this would present a more challenging environment for the precious metal.
In summary, we find ourselves at a crossroads. Further clarity is needed in order to establish the most likely trajectory and determine whether gold will remain unloved by investors. It would also be remiss not to mention the new kid on the block: Bitcoin (and cryptocurrencies more broadly). These may exacerbate the dampening effect on the price of their more glittering rival owing to their appeal among the millennial generation, who may view digital assets as being interchangeable with gold on account of their status outside the traditional monetary system. Given all the considerations mentioned above, only time will tell how gold fares and whether its time-honored role as a safe-haven asset with inflation-hedging properties will be deemed both relevant and valuable in the context of potentially more dominant macroeconomic forces.
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. Where the portfolio has exposure to hedge funds, gold, private equity and property via publicly quoted transferable securities, there are additional risks associated with these sectors.
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.