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Everything's glittering except gold -- and financial journalism
Everything's Glittering Except Gold
By Mike Bird
The Wall Street Journal
Thursday, February 18, 2021
You have to feel a little sorry for investors in gold. Central bankers and finance ministries have opened the cash sluices, and what looks like a speculative boom is under way in many corners of global financial markets. But over the past 12 months the yellow metal -- the original darling of skeptics of spendthrift governments -- has underperformed the S&P 500.
At a bit below $1,800 a troy ounce, gold prices are far below the highs of around $2,050 reached in early August.
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Watching bitcoin hit $50,000, SoftBank's stock price surpass its dot-com boom high and even silver catch a bid from retail traders must be particularly difficult for holders of gold. Many had expected that the original speculative asset would prosper under the unusual market conditions of the past year.
But it simply hasn't worked out that way.
The metal's recent performance should be confirmation, if any were really needed, that buyers of gold are really just buying inflation-protected government bonds under a different name. Since 2005, the yield on 10-year TIPS -- inflation indexed U.S. government bonds -- has had an R-squared relationship of 0.81 with the daily price of gold, meaning the moves in one explain the majority of moves in the other.
A plethora of other explanations for gold prices, like physical demand, flows from central banks, and the rising popularity of exchange-traded funds may have some meaning, but those have been minnows in terms of their impact on the direction of prices. If real interest rates aren't falling, it is hard for gold to sustain any meaningful gains. If they aren't rising, it is hard for gold to fall much. Beyond that, there isn't much going on except to the most committed and involved analysts.
So what happens to the price now mostly depends on your view of the Federal Reserve's actions and the capacity of the U.S. economy: 10-year market inflation expectations are at their highest levels since mid-2014, but bond yields have risen to match.
Investors who have a strong view on whether inflation is coming and if so whether the Fed would react quickly against it might make a bet on gold. Otherwise it is hard to see the appeal.
Write to Mike Bird at Mike.Bird@wsj.com.
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Thursday, February 18, 2021
Dear Mr. Bird:
Your commentary in the Journal today, "Everything's Glittering Except Gold" --
-- omitted the primary explanation for the question you raised. That is, daily intervention by central banks in the gold futures and related markets -- longstanding Western central bank policy.
This intervention was documented extensively in a presentation I made this week to the Gold Week Africa conference in Lagos, Nigeria:
I told the conference that the first rule of mainstream financial journalism, including the Journal's own journalism, is never to put to a central bank a critical question about gold, or about anything else for that matter.
Please consider breaking that rule.
With good wishes.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
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