What the Record-High Gold Price Is Really Signalling

What the Record-High Gold Price Is Really Signalling

The Gold spot price hit an all-time high this week, rising above US$2,000 an ounce.

So far this year, gold in US dollars has delivered an over 36% return.

As a side note, if you are looking to get exposure to the gold rally by buying gold, check out Shae Russell’s step-by-step guide, ‘The Best Way to Buy, Sell and Store Gold’, here.

Driving prices higher are geopolitical tensions, fear…and the pandemic, of course, which was truly an unexpected event.

To prevent defaults and bankruptcies, the US Federal Reserve flooded the economy with a lot of money.

The problem is that this crisis couldn’t have come at a more vulnerable time. Interest rates were already at record lows and the world economy is straddled with lots of debt.

In the US, the unemployment rate has shot up from a record low of 3.5% since the beginning of the crisis to 11.1%. High debt and no income aren’t good news for consumers or the economy.

The Fed says ‘there is no limit’ to what it can do. We are about to test that theory.

So far, the Fed has cut interest rates to zero and flooded the system with cash.

It’s pushing gold prices higher.

Bond yields are at lows, with the 10-year Treasury yield hitting 0.52% this week. Jim Reid from Deutsche Bank couldn’t have expressed the significance of this better:

The U.S. has been through depressions, deflations, wars, restrictive gold standard regimes, market crashes and many other major events and never before have we seen yields so low back to when the Founding Fathers formed the country.

Gold doesn’t pay interest. But when real yields are negative, it boosts the case for gold.

The value of the US dollar is also plummeting. It’s dropping against gold, but also against other currencies.

As you can see below, the Dollar Index Spot, which measures the US dollar against a basket of currencies, is nosediving.

US Dollar Index and Gold Spot Price

Source: Bloomberg

It’s all about confidence.

As you can see below, gold has rallied three times.

USD Gold Price Chart - Long Term Gold Price Movement

Source: Gold Price

Once in 1973, when US President Richard Nixon ended the convertibility of US dollars into gold and the currency turned fiat. A fiat currency is one that isn’t backed by anything.

Then it rallied once again in 2000, when low interest rates inflated the dotcom bubble and then property. It kept going in the aftermath of the 2008 crisis and during the US Fed’s quantitative easing programs.

And now today, where we have a pandemic that has brought in more unconventional policies, record low interest rates, and a stock market that has strayed away from the real economy.

At the end of the day, gold’s rally is also about confidence, or lack of it.


Selva Freigedo,

For The Daily Reckoning Australia

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