Why isn't gold soaring?

Inflation fears and the declining dollar haven't pushed gold much higher — yet
MAR 05, 2018

Gold is the investment for times of disaster, disruption and global dislocation. So why has gold been so tranquil this year? It's a difficult question. When the most recent correction in the stock market started on Jan. 26, gold sold at $1,354. As of Friday, the yellow metal sold for $1,322, a 2.3% decline. What's particularly odd about gold's lackluster performance is that the stock sell-off was sparked by inflation fears, something that most investors think drives gold higher. Even more peculiarly, gold fell in lockstep with the value of the U.S. dollar on foreign currency exchanges. That doesn't rule out gold as a safe haven. "To me, a safe haven isn't something that soars whenever everything else goes down," said George Milling-Stanley, head of gold strategy at State Street Global Advisors. "Usually, whenever there's a significant sell-off in stocks, gold does a knee-jerk dip and recovers." In reality, the gold market has several factors that affect its price, and inflation and the dollar are just two of them. Todd Rosenbluth, director of ETF and mutual fund research at CFRA, isn't convinced that inflation is a driving force in gold, noting that it has a mildly negative correlation with inflation. "The best environment to own gold is one in which the dollar, inflation and interest rates are declining," Mr. Rosenbluth wrote in a note to investors. During the stock correction, inflation was rising, the dollar was falling and interest rates were declining.
[More: The best way to own gold]
Inflation fears have only increased this year given that the $1.5 trillion tax cut could stimulate the already growing economy to the point where wages and prices begin to spiral. The prospect of a trade war also stokes inflation fears because tariffs will increase the price of imports. It's worth noting that gold's most recent rally began on Dec. 8, as conviction grew that the tax bill would pass. Gold also has two fundamental factors going for it: growing demand from emerging markets and limited capacity for new production. Jewelry accounts for about two-thirds of the demand for gold, and much of that comes from emerging markets. "We're seeing that economic growth is fastest in the parts of the world that like gold the most," Mr. Milling-Stanley said. And mining companies can't just snap their fingers and open a new gold mine every time demand rises. It can take years to identify a new mine site, get clearances to open the mine and begin production. And recently, new gold discoveries have been rare. "While mining companies would like to see growth in new production, they are barely seeing enough to sustain current production," Mr. Milling-Stanley said "Production peaked in 2014, and it's likely to decline for the foreseeable future." William Bernstein, co-founder of Efficient Frontier Advisors, noted in his book, The Four Pillars of Investing, that gold is a good hedge against economic catastrophe, such as the 2008 financial crisis, when the yellow metal soared. Adding a bit of gold — say 5% — to a portfolio and rebalancing regularly can help hedge against long-odds risks. Jerry Garcia, front man for the Grateful Dead, noted that the band's fans were like people who are fond of licorice. "Not everybody likes licorice, but the people who like licorice really like licorice," he once said. The same is true for gold: People who like gold really like gold and rarely have a bad word to say about it. But at least at the moment, inflation, the dollar, demand and production seem to be on the gold bulls' side.

Latest News

SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees
SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees

Eliseo Prisno, a former Merrill advisor, allegedly collected unapproved fees from Filipino clients by secretly accessing their accounts at two separate brokerages.

Apella Wealth comes to Washington with Independence Wealth Advisors
Apella Wealth comes to Washington with Independence Wealth Advisors

The Harford, Connecticut-based RIA is expanding into a new market in the mid-Atlantic region while crossing another billion-dollar milestone.

Citi's Sieg sees rich clients pivoting from US to UK
Citi's Sieg sees rich clients pivoting from US to UK

The Wall Street giant's global wealth head says affluent clients are shifting away from America amid growing fallout from President Donald Trump's hardline politics.

US employment report reactions: Overall better than expected, but concerns with underlying data
US employment report reactions: Overall better than expected, but concerns with underlying data

Chief economists, advisors, and chief investment officers share their reactions to the June US employment report.

Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading
Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading

"This shouldn’t be hard to ban, but neither party will do it. So offensive to the people they serve," RIA titan Peter Mallouk said in a post that referenced Nancy Pelosi's reported stock gains.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.