The world is abuzz over gold’s recent rally to a record high of US$2,000 and beyond. Some believe this is just the beginning of a longer rally, one that could see one troy ounce fetch as much as US$3,500. Others believe the yellow metal is already overpriced and are predicting a correction—although a very mild one. The elevated forecast stands in contrast to a world economy that is in rapid recovery mode; shouldn’t gold be going the other way?
Let’s retrace gold’s recent steps. During the global financial crisis, prices surged from the $800 level in late 2008, spiking at just less than $1,900 in summer 2011. High prices persisted; it wasn’t until mid-2013 that they corrected back to $1,200-$1,400, where they remained until mid-2019. From there, it was a six-month, pre-COVID-19 march to $1,600. Only then did prices jump to $1,700, dip and then up again, and now the spike that has taken us north of the 2011 peak. What’s going on?
When it comes to goods, most see gold as the goodest. After all, we commonly say, “As good as gold,” and so on. But gold price spikes are often a sign of concern, and today is no exception. A growing number of negative developments seem to be spurring the current surge. Among top concerns is fiscal deterioration. Radical COVID-19 stimulus plans are ramping up public debt-to-GDP ratios everywhere. The Organisation for Economic Co-operation and Development (OECD) projects that average public debt for member states will soar by 17% as a share of GDP in 2020 alone, with the key ratio forecast to hit slightly less than 130% in 2021. Ratings agencies used to blanche at breaching 100%, so current levels are worrisome to them, and fuel for gold bugs.
Another bugbear for gold is inflation. The revival of quantitative easing programs in the United States and in Europe, not to mention Canada’s own first-ever program, have stoked inflation fears—especially among those who still foresee a return to pre-COVID-19 levels of activity in the next year or so. They worry that there will be simply too much liquidity in the system to avoid a rapid acceleration in prices.
Unfortunately, we don’t get off the hook if things go the other way. Gold has also done well in periods of disinflation or deflation. Here, concerns turn to liquidity logjams and reticence on the part of many to part with scarce cash. The likelihood of this outcome depends critically on how quickly and thoroughly the global economy emerges from COVID-19.
Financial system difficulties can also add to the unease that boosts gold. As we learned in the global financial crisis, overall system strength is quite dependent on weaker institutions holding their own. COVID-19 is expected to increase corporate leverage, and the post-pandemic fallout remains to be seen.
Sovereign debt downgrades are on the rise, and there is a rising risk of emerging market defaults and International Monetary Fund (IMF) intervention on a number of fronts. Economies that are dependent on tourism for a large share of annual foreign currency earnings are in trouble. Oil-producing nations face similar pressures, as do nations that are more generally highly trade-dependent. Difficulties at the country level add to pressures on an increasingly weaker global situation, and are likely adding to gold’s current shine.
With so much economic flux, it’s increasingly challenging to calibrate currencies. As they are typically measured against each other, deterioration of all economies simultaneously leaves few, if any, benchmarks. It’s less clear that traditional reserve currency havens are what they used to be, and the murkiness is further complicated by threats to the global trade system. Circumstances have actually revived talk in some circles of moving back to a gold standard. Put all of the chatter together, and it’s hard to keep the speculators from getting twitchy.
To these we can add a host of other concerns. The battle against COVID-19 is up against rising second-wave infections. True and lasting economic recovery is highly contingent on controlling the pandemic. Unfortunately, the general sense of uncertainty has been upped by renewed trade wrangling, particularly the escalation of China-U.S. tensions. It doesn’t help that stimulus measures are stranded in a U.S. legislative impasse, and all in the middle of an acrimonious U.S. election process.
