Michael Nevin for Tradeback, December 29th 2020

For all the attractions of bitcoin, gold remains the safe haven of first choice for many. Easy to store, virtually impossible to destroy, simple to carry, universally acceptable and instantly exchangeable for cash in any major city across the globe, it remains one asset you want to hold during times of trouble and turbulence.

So it has proved ever since the collapse of the Bretton Woods system in the early 1970s.  Until 1972, the US Government guaranteed conversion of the dollar into gold at $35 an ounce.  By 1980, the price of gold had increased almost twentyfold to $600 an ounce. A similar sharp increase in gold prices followed the breakdown of the Gold Standard during the Great Depression of the 1930s.  And again after the international financial crisis of 2007/08 – anyone buying gold for $600 an ounce back in 2006 would have seen the value of their holdings almost triple by 2011.

A less dramatic price increase has occurred this year in response to the Covid-19 pandemic.  A year ago, gold stood at just under $1,500 per troy ounce;  today it stands at just under $1,900 – an increase of 25% over the year.  The trend in daily prices and the 30-day moving average is shown in the graph below.

Source: FRED (Federal Reserve Economic Data) published by the Federal Reserve Bank of St Louis.  

However, as the monetary system stabilises and fragile confidence begins to return, gold is not such a good investment.  Its price fell by half from $600 to around $300 an ounce through the 1980s and 1990s, and it also fell back from almost $1,800 in 2011/12 to less than $1,100 an ounce by the end of 2015.  Because gold pays no interest or dividends, it is not a particularly good investment once a crisis has passed.

So where next for gold?  If the vaccines currently being rolled out to combat Covid-19 prove effective and an immunisation programme is extended across the world, one would expect the current lockdowns to be eased and the world economy to gradually recover.  Plus some of the political factors that have generated instability this year seem to be easing, with the conclusion of a Brexit deal and the replacement of a volatile, unpredictable and often confrontational US President in the shape of Donald Trump with a successor likely to prove more stable in the shape of Joe Biden.  That doesn’t necessarily mean an end to the trade war with China, but on balance these factors suggest that gold prices may soften during 2021.

Michael Nevin is the author of The Golden Guinea: The International Financial Crisis 2007-2014, Causes, Consequences and Cures.