By Lisa Beilfuss Follow Updated April 22, 2022 7:01 pm ET / Original April 22, 2022 5:56 pm ET
Gold bugs have been a lonely bunch, but that may be starting to change.
In the past week, gold made another run at $2,000 a troy ounce, a level above which it has closed only once, back in August 2020. The price then retreated—bullion was trading around \$1,935 an ounce on Friday—making the run-up easy to dismiss as just another head fake for a metal that has trudged along as its commodity cousins have exploded upward in price.
Consider the CRB Index, comprising about two dozen commodities, which has more than doubled since the U.S. emerged from pandemic lockdowns. Gold has gained only about 15% in that stretch. But macroeconomic and geopolitical developments suggest the possibility of a new heyday for gold enthusiasts.
One of the best arguments against gold right now is flawed. Market strategists note that gold moves in the opposite direction of real yields, or Treasury yields that are adjusted for inflation. The idea: Rising yields typically suggest improving economic conditions, a negative backdrop for gold, and they boost the opportunity cost of holding gold, which provides no yield. As investors anticipate more Federal Reserve tightening, real yields have risen rapidly and briefly turned positive for the first time since early 2020, based on trading in the Treasury inflation-protected securities, or TIPS, market.
Jim Reid, head of credit strategy and thematic research at Deutsche Bank, says he’s not convinced that the bond market’s prediction of future inflation is so useful. Instead, he calculates real rates based on the consumer price index, which recently registered a year-over-year increase of 8.5%, a 40-year high. By that measure, real interest rates are still deeply negative; Reid expects they will remain negative for the rest of his career.
The kind of skepticism that Reid expresses about a sufficient slowdown in inflation is energizing longtime gold bugs and creating new ones. Lawrence Lepard, managing partner of Equity Management Associates, is betting that gold hits $3,000 within the next two years. He is skeptical of the consensus view that inflation has peaked, and doubtful that the Fed will bring inflation back down near its annual 2% target.
“I believe they have an empty hand,” Lepard says, predicting the Fed will tighten for the next year before a downturn in the economy and the markets forces a more dovish pivot. While central bankers say they will soon start unwinding some of the bond purchases made over the past two years, Lepard sees rate cuts and more quantitative easing within the next year. His bet? More money supply, more inflation, and more demand for gold as investors seek what he calls “sound money.”
Greenlight Capital’s David Einhorn hit that theme in his quarterly letter to shareholders this past week. “Is the Fed doing whatever it takes, or is it just talking tough, while in reality implementing a weak initial response that could exacerbate the problem? We think it is clearly the latter,” he writes, adding that gains in inflation swaps and gold in the firm’s funds more than offset losses elsewhere.
There is a second piece to many gold bulls’ long-gold view. Equity Management Associates’ Lepard says the seizure by the U.S. of Russia’s foreign-exchange reserves will fuel more demand for gold, which countries can’t seize. Some on Wall Street are starting to see it that way, too. Analysts at Goldman Sachs predict record-high gold demand from central banks this year as geopolitics prompt shifts to gold.
That makes sense, given extreme risk aversion among foreign official-sector investors, says Joseph Wang, a former senior trader on the Fed’s open markets desk. “Now that they see their dollars/Treasuries can potentially be sanctioned, they will likely hold a bit more gold as part of their foreign reserves,” says Wang, emphasizing the amount of foreign reserves held by China.
Retail investors are also exhibiting more interest in the yellow metal. Gold coin sales rose about 48% in 2021 from a year earlier, data from the United States Mint show, while purchases of gold exchange-traded products hit a record last month.
Christopher Liitt, of Upstate Coin & Gold Center in Fayetteville, N.Y., says he has been increasingly busy. Customers cite inflation and concerns about the dollar, he says, adding that most of the people buying significant amounts of gold lived through the inflation of the 1970s and 1980s. But some younger customers are buying gold with the money they have taken out of cryptocurrencies, says Liitt.
To some, Bitcoin and other cryptocurrencies have upended the case for gold. Gold bulls say investors will inevitably realize crypto isn’t a substitute for gold, prompting a new awakening. Bitcoin may have stolen gold’s thunder, but it is a risk asset that went up for the same reason that many high-growth stocks soared in recent years, says Peter Schiff, founder of Euro Pacific Asset Management. “That demand will shift into gold as people realize Bitcoin isn’t doing what they thought,” he says. “Gold isn’t about getting rich; it’s about staying rich—or not going broke as inflation wipes people out.”
Cryptocurrency research firm Arcane Research says Bitcoin’s 30-day correlation to tech stocks has climbed to about 70%. As for the idea that Bitcoin is “digital gold,” at least right now it remains “digital QQQ,” short for the popular exchange-traded fund that tracks the Nasdaq 100, says Peter Boockvar, chief investment officer at Bleakley Advisory Group.
he recent decline aside, gold’s price has been slowly grinding higher while Bitcoin’s price stayed in a relatively tight range for the past 12 months, says John LaForge, head of real-asset strategy at Wells Fargo Investment Institute. “Bitcoin has been getting much of the attention lately, but we think gold may be the next play,” he says.
There is another reason to buy gold, and it is simply supply and demand. Gold supply is dropping below its five-year average, LaForge says. Each time that has happened, going back to at least 1900, a multiyear gold-price rally followed, he says.
It hasn’t been easy to be a gold bug. But instead of the twilight many have predicted, gold enthusiasts might see a new day dawn.
Write to Lisa Beilfuss at lisa.beilfuss@barrons.com
