With inflation arriving after the colossal money printing operations of Global central banks during Covid, it has been a mystery why Gold hasn’t rallied hard. Instead it has fallen back.
Here are some of the reasons.
Gold consumption has fallen hard as the jewellery market demand halved during the pandemic.
Bitcoin and other Crypto has held the attention of all speculators and a significant Gold audience has been distracted to it while it has rallied multiples.
Gold in the short and medium term doesn’t always go up with rising inflation, but goes up in sharp rallies. You can see this in parts of the 1970s when gold actually fell in some years.
Stocks have been such a strong one-way bet, why bother with slow boring assets like Gold when the fun is just a click away in the likes of Apple and Tesla?
While physical precious metals were hard to come by, there are plenty of outlets for trader-friendly ‘paper’ gold to soak up any demand for investors and traders unhappy with actually looking after the real stuff. The infinite paper supply can and does work against any sudden demand rush that would rally any physical asset with fixed supply.
The trends are quite clear. A big rally, followed by a pullback with a recent change of trend turning slowly from Bear to Bull. It's pedestrian but taking the above.
Demand drop. Jewellery demand is back and will soon be at pre-covid levels. Retail will turn to it as inflation continues and it should rise above 2019 levels.
Crypto. The dream of $100,000 Bitcoin or $1m Bitcoin is over for now and its heavy falls should put a lot of people off the idea that it’s better than Gold and dissuade the foolish from believing the received tale that Bitcoin is an inflation hedge.
Most people think Gold just went up in a straight line in the 1970s but it actually rose and fell. However overall during that decade Gold went up hugely in that era of high inflation.
Most people realise the Federal Reserves campaigns of liquidity generation which produced free money for financial markets is responsible for a boom/bubble market. Everyone knows the tap is getting turned off. As with Bitcoin, who will want to buy the dips and trade the market stars as the upside vanishes and the downside gaps frighteningly? From greed to fear, from Equities to Gold.
Markets go with the trend. Paper gold is often the equivalent of a systemic short, where the market is riding a ‘soft’ market down. If the trend reverses, the paper market will reverse too, with the writers of paper Gold suddenly the buyers of it.
So there was no number 6 on the reasons Gold hasn’t rallied hard with inflation, but Gold is a classic haven and the world is very quarrelsome at present, with the usual suspects stirring away. A Ukrainian incident would certainly give Gold a shove.
In the 70’s, interest rates were very high but so was inflation, and unless you think Governments are going to throw their economies off a cliff and break their tax revenue and crystallize their vast debts and deficits, then inflation is going nowhere except perhaps up.
So it will be a mystery if Gold does not go over $2000 in 2022. It will perhaps go much further than that.