All That Glitters Is Not Gold

William Shakespeare is always a solid source for a quote. This one is particularly apt to describe the current state of trading for the market’s favorite precious metal. With other commodities like oil and copper showing strength in recent weeks, gold has been a notable laggard. The chart below tells that story better than I can:

Gold Futures (red/green) vs. Copper Futures (blue) and Oil Futures (purple)

Gold Futures (red/green) vs. Copper Futures (blue) and Oil Futures (purple)

Source: Interactive Brokers TWS

During the stock markets’ meltdown in March, gold did a reasonable job of providing a hedge. It fell, but by less than major equity indices. The downdrafts in oil and copper were far more dramatic when global economic activity ground to a halt. When global central banks and governments implemented measures the stabilize the world economy, all three of those commodities found a bottom. We saw a fairly synchronized rise throughout the summer as the unprecedented liquidity injections raised a wide range of asset prices.

A change occurred in the August-September period. Gold and oil peaked, while copper continued its advance. In November, oil reversed course and moved higher while copper futures raced upward. Yet gold continued the downtrend that began in August.   If the stories about massive commodity acquisitions by the Chinese government are correct, it makes perfect sense that copper and oil would outperform gold. A nation that is stockpiling resources would cause the prices of those commodities to rise. Copper and oil are crucial to the modern industrial economy. Gold is not (despite being an excellent electrical conductor). 

Underperformance is one thing, an outright decline another entirely. The conditions for a stronger gold price were in place in August. In fact, they remain in place now. Interest rates remain near zero, meaning that the opportunity cost for holding non-interest-bearing assets like precious metals is minimal. A weaker dollar and higher commodity prices should also provide support to the price of gold. Both of those conditions have been in place in recent months, yet gold continues to decline. Why?

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