Gold’s Ups and Downs

King Midas lusted after it. The Incas worshipped it. Shiny flakes of it set off a 19th-century rush to California and families in India use it to store wealth on the arms of their daughters. Gold’s allure remains as untarnished as the noble metal itself, even as its price is subject to manias and periods of ambivalence. Bullion is best known as a time-honored haven from inflation, but there are a plenty of conflicting factors at work that can excite investors. As financial markets convulsed during the coronavirus pandemic, gold surged past $2,000 per troy ounce to a record high. That breathed new life into the old question of why investors still bother with what’s likely the most primitive form of money in their portfolios.

Gold climbed to a new peak in August 2020 as the health crisis unleashed a torrent of forces that fueled demand for its perceived safety from the turmoil. Moves to cushion the global economy from the worst recession in a generation led to the creation of vast amounts of new money by central banks, sparking the same fears about an eventual resurgence of inflation — and even a possible debasement of the U.S. dollar — that drove gold to its previous record in 2011. Unexpected events and geopolitical tensions can cause bullion to spike, such as salvos in the U.S. trade war with China. That conflict, along with the coronavirus, helped push the metal up 70% from late 2018 to late 2020, even as inflation remained subdued. Some traders pointed to a drop in expected real rates, the closely watched measure of interest rates adjusted for inflation. When interest rates fall, gold becomes more attractive because the opportunity cost of holding the metal — which produces no fixed payments or dividends — decreases.