Gold price forecast: gold bugs & equity investors are on the same team (and that’s weird!)

on Feb 23, 2023
  • Gold and equities are moving hand in hand despite traditionally being viewed as uncorrelated
  • Gold's hedge properties have protected investors but are not perfect, and the asset is now trading curiously
  • Our Analyst Dan Ashmore charts gold against inflation, interest rates & recessions to assess its price drivers

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Call me a boomer, but I love talking about gold. 

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It occupies such a funny little place, both in financial markets and the human psych. This enigmatic metal is equally at on a Bloomberg terminal ticker as it is on a poster of the periodic table on the wall of a school lab. 

Let’s focus on the financial side here because my chemistry is rusty. I wrote yesterday that we are at a funny time in the economy where fears of a recession have usurped inflation in the markets lately. Typically, as the chart below shows, gold has done pretty well in times of recession – but not always. 

This gets at what gold has traditionally been viewed as: a hedge. An uncorrelated asset which investors can lean upon to diversify one’s portfolio. It’s not perfect as that relationship is far from symbiotic, but it’s OK. 

Perhaps the two best recent examples of this are 2008 and 2022. The former saw financial markets meltdown, but gold held firm. And the same story last year, although with the damage in equity markets not as severe. 

But there is something funny happening at the moment. This uncorrelated nature is beginning to flip. And it’s a testament to how weird the current macro situation is. 

Take the next chart. Here I have plotted inflation over the last half century against the price of gold. It tracks it reasonably well – this is another one of gold’s traditional attributes, an inflation hedge – albeit not perfectly. 

However, there is a clear and signficant divergence in the last couple years. Just when inflation really roars, it seems gold has bailed on all those investors who believed it to be a hedge. Much like the English football team, it seems gold has fallen flat when we needed it the most, in the biggest moment. But why?   

Firstly, I am not sure that is fair (not the England jab – you’re telling me no trophies since 1966 is fair for a country with the best league in the world?). These past couple of years have seen risk assets melt down – the S&P 500 fell 19.4% last year, the Nasdaq 33.1% – and yet gold has traded flat. 

So, that does represent a good hedge. It’s just that the inflationary cocktail of the last year or two is not the same as previous. Let us not forget we are coming out of an extraordinary period in history as a result of something called COVID-19. This created economic shocks and consequences which we have never really seen before. 

Supply chains were squeezed, with China only opening up recently. There was a nasty energy crisis due to the war in Ukraine. Then there are also the enormous stimulus packages and money printing that central banks pursued to kickstart economies which ground to a halt during lockdowns. 

And we are now in this curious spot where the markets – and the economy at large – are more dependent than ever on the policies of central banks. Interest rates were hiked to pull inflation in, and accordingly down came stock prices. 

But the thing is, gold did the exact same thing. And it is continuing to do it. The below chart shows how gold fell more or less from March/April when the Fed transitioned to this tight monetary regime. 

Then for a couple of months around November to January, gold rose as the market moved to the expectation that future rate rises would taper off sooner than previously anticipated due to lower inflation readings coming out. So stocks rose, but gold did too. And then the duo both dropped again in the last few weeks as the market thinks, “woops, maybe we jumped the gun a bit and more interest rate rises are coming in the future”. 

For stocks, this all makes intuitive sense. Money becomes more expensive, future cash flows are discounted to the present at higher rates, and hence valuations come down. So share prices and interest rates are directly correlated. 

For gold, it seems like the opposite should happen, right? Well, it’s odd at the moment because it is all based off expectations. So as inflation comes down, the chance of future rate cuts and lower interest rate policy creates a potential for more inflationary future and hence a boost to the current gold prospects and price. A little confusing, but essentially expectations of the future are trumping the present right now for gold investors. 

In a way, it’s part of this “bad news is good news” kind of thing, where the market cheers bad news because it means demand is falling and the economy is cooling, so inflation may come down, and therefore rates will be cut. And if rates are cut, the whole thing goes up. I wrote about this phenomenon last October, and it hasn’t changed much since. 

This is just another fallout of the weird scenario we are all in right now, in that the Fed’s actions have such an extreme impact on the markets. This is always the case, but in the last year, it has been more so than ever as the world battles the worst inflation crisis since the 70s. 

If we look at gold over the last 20 years, the pattern against interest rates is not overly strong. We saw it rise consistently from 2004 to 2011, before falling from 2012 to 2016 and then jumping up in 2019 and 2020 before being more or less steady since. 

So this is not a long-term thing. There have been pockets where this has happened in the past, albeit likely spurious as the relationship never really held. 

But right now, equity investors and gold bugs are on the same team, which is weird. 

So, for the time being, gold bugs and equity investors are comrades. They are both hoping the fight against inflation continues to come down, following the positive signs of the last few months. This will allow the market to continue pricing in a pivot off tight monetary policy sooner rather than later, which will in turn set the stage for an expansion in asset prices across the board down the line. 

But this isn’t a bond till the end of time. When this time down the line does arrive, when the Fed pivots and asset prices are primed again, gold and equity may break off from each other once more. It’s just a weird time right now. As the narrator from Fight Club said, “you met me at a very strange time in my life”. 

If you enjoyed this piece but think I write too much, perhaps this podcast episode from last month may be better suited, where I chatted with the Director of Research or gold marketplace BullionVault, Adrian Ash, about gold as an investment. 


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