And it is not just the absolute level of alternative income streams that matters. If the perception increases that inflation is back on the radar, then the real, price-adjusted value of a bond’s coupon, is reduced yet further. It might, as now, even turn negative, making gold’s zero return look positively generous. Now, clearly, inflation is not a problem today, but the measures employed by governments and central banks to support economies through the pandemic are a step into the unknown. Inflation could well be a big problem tomorrow.
These factors explain the performance of gold to date. They probably do not provide a reason for it to continue rising. Indeed, for that to happen we would need to see a move further into negative territory for real bond yields. And that would require either higher inflation, or lower growth, or both. It is possible, but so too is a repeat of the 2011 scenario in which inflation fails to show up and growth bounces back. That would be a recipe for a sharp retrenchment in the gold price from here.
To make the case for a materially higher gold price from today’s elevated level, you need to go back to that critical year, 1979. And while it isn’t necessary to go fully down the “guns and tinned goods in the backwoods of Idaho” path, you do need to entertain the idea that the events of 2016 to 2020, Brexit to Trump to Covid-19, actually changed everything.
Between December 1978 and January 1980, the price of gold more than quadrupled from under $200 an ounce to more than $800. This is the equivalent of a rise from the $1,200 an ounce at which gold traded last September to around $5,000.
Agonising about whether you have missed the gold and silver boat at today’s record high of just over $2,000 will seem ludicrous if we get a rerun of 1979’s flight to safety. It is not hard to see why investors were so unsettled in 1979. The election of Margaret Thatcher in Britain and the appointment of Paul Volcker as chairman of the Federal Reserve that year marked a sea-change in the post-war consensus about how to manage the global economy.