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What’s Holding Down the Gold Price?

Last update on: Jun 05 2020

The price of gold has been tumbling most of this year. This article offers some explanations and also compares gold to TIPS, pointing out that most of the time there’s a high correlation between the two. His basic argument is that strong economic growth is bad for both gold and TIPS.

For the past 5 years, gold and TIPS prices have been irregularly declining, because the market is coming to appreciate that the outlook for economic growth is improving, and that lessens the need for accommodative monetary policy and that in turn lessens the risk of an unexpected rise in inflation. Moreover, the returns on other assets have been very attractive of late, and that weakens demand for gold and TIPS because neither promise much in the way of return (gold pays nothing, and the real yield on TIPS is meager). Plus, there is just less need these days for the security and safety of either asset. And of course there is less demand for inflation hedges now that we have seen two decades of inflation averaging 2% or less, and now that the Fed is beginning to reverse its quantitative easing stance.

 

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