Why isn’t gold soaring?

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.

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.

Related Topics: State Street Global Advisors