With no gold rush, are investors really worried about inflation and a growth slowdown?
- Despite warnings about rising inflation amid supply-chain disruptions and tight labour markets, the gold price has defied expectations and remained steady
- As inflation pressures ease and central banks shift away from emergency policy settings, investors will look elsewhere for income and diversification
Gold is one of the world’s oldest financial assets and often seen as a safe harbour when capital markets get choppy. It is considered a hedge against rising inflation and a store of value in the face of economic calamity.
Gold has historically exhibited a strong negative correlation to equities, particularly when inflation is high, as was evident in the 1970s. Gold has provided positive returns during shocks to the growth outlook and when inflation has soared.
Perhaps crucially, it does not provide any income. There are a range of other assets that could diversify a portfolio, hedge against inflation and provide an income.
It is this trade-off that is keeping the gold price supported against what is still a positive economic backdrop and one in which inflation pressures are likely to moderate from today’s elevated levels. To provide ballast in portfolios against equities, investors have held government bonds.
In the past, the higher coupon may have been enough to offset some, or all, of that loss. However, today’s coupons are too thin to cushion the fall.
This is where gold looks more appealing – a store of value that offers no income is better than one that offers a negative return. In August, the real yield on the US 10-year Treasury fell to its lowest level in more than a decade.
Real rates might remain negative as the rate of inflation is likely to be higher than the nominal yield on government bonds for a while.
However, as inflation pressures ease and central banks shift away from the emergency policy settings now in place, real yields will start to rise and the trade-off of holding gold will increase. Investors are then likely to look for other assets that can fulfil the roles of diversification and income generation.
Those investors who believe inflation will remain at elevated levels might want to own gold to protect against this risk. Similarly, if you think another recession is around the corner, gold might make sense.
However, if, like me, you foresee continued global economic recovery, sticky but not excessive inflation and the normalisation of central bank policy, then gold does not shine so brightly.
Kerry Craig is a global market strategist at JP Morgan Asset Management