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Gold – Where Next?

The price of gold has traded with a bearish tone ever since it reached the $2,000 level. Plenty of reasons are behind the correction. One is the fact that gold has stiff competition as a store of value from Bitcoin. More and more institutional investors come out and say that if there is something they value in Bitcoin, it is the potential store of value characteristic. As such, many traders chose out of gold and into Bitcoin, explaining the recent divergence in the two assets. 

Another is the positive vaccine news. Today is the third consecutive Monday when the world receives positive news on the fight against the pandemic. After Moderna and Pfizer, it was AstraZeneca’s turn to announce that its vaccine has a 70% efficacy in preventing COVID-19. While the level is below the one announced by the other two companies, the Astra-Oxford vaccine can be kept at refrigerator temperature, making it easier to transport.

What does it have to do with the price of gold? The argument here is simple – the closer the world gets to the end of the pandemic, the more pressure builds on the price of gold.

The USD to Dictate Direction

The chart above shows the tight correlation between gold priced in USD and the inverted U.S. 10-year real rates. Effectively, it shows how the dependency of the price of gold on the overall monetary policy in the United States.

Gold was driven to a new all-time high during the COVID-19 pandemic because investors looked for safety. A hedge against inflation, more precisely. The lower USD was the dominant theme during the summer of 2020, with the greenback losing value on all fronts.

Now that the world moves closer toward the end of the pandemic, the safe-haven argument of owning gold diminishes. However, the hedge against inflation remains a valuable argument for owning gold in the future.

Think of the dynamics in the price of gold prior to the pandemic. It broke higher six months before the first cases were mentioned in China. In other words, the investing community kept adding gold to portfolios for other reasons than a safe haven because economic growth was strong before the pandemic.

Therefore, another attempt at the highs is not impossible for the price of gold. Only that this time it is strongly dependent on developments on the monetary policy, rather than on the pandemic front.

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