A hedge against what some investors fear is the potential collapse of the entire monetary system

Forbes recently published an article highlighting the roughly 30% rise in the price of gold since March 2020 and a couple underlying fundamentals which are typically correlated with an increase in the price of gold, namely the falling value of the dollar and a loose monetary policy that sends real bond yields lower. More importantly however, the article emphasizes that a couple other fundamentals that typically adversely impact the price of gold, low inflation and a strong stock market, have not impacted the ability of the metal’s price to increase so substantially. With the fundamentals not adding up, the author opines:

“To understand what’s going on, we need to take into account the deep and all-pervading uncertainty facing investors. In spite of the occasional, brave prediction for a quick, V-shaped rebound, nobody really knows what a post-pandemic recovery may look like, or, more troublingly, how much larger government deficits will get before it arrives. We also can’t gauge just how much damage has been done to the real economy, because massive wage subsidies and business loans have masked it.”

“Only when these subsidies are withdrawn will we know how bad things really are. Add to this the concern that many of the jobs lost during the pandemic won’t come back when it’s over. Many businesses will have found ways to substitute workers with automation, robotics and algorithms. The bottom line is that Covid-19 compelled many governments to put their economies into the equivalent of an induced coma, cutting off both demand and supply. Our understanding of past recession-recovery cycles is, therefore, of limited use and perhaps even irrelevant.”

And perhaps most sobering

“This leaves us with a general sense of anxiety. The dictionary definition of anxiety is a state of apprehension about what may happen in the future. This is the emotional state behind the seemingly conflicting hedging behavior in markets. And gold’s staggering rise may be not just a search for relative security, but a hedge against what some investors fear is the potential collapse of the entire monetary system.”

Hedrick-Wong, Y (2020 September, 18) Anxiety Looms As Gold Prices Rise. Retrieved from

Dillon, J (2020 May, 5) https://www.forbes.com/sites/yuwahedrickwong/2020/09/17/anxiety-looms-as-gold-prices-rise/#3be822d13561