Gold Will Continue Sailing Past Its Record High

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As gold has exceeded its previous record high, many question if the disconnect in financial markets is causing a “buy everything” rally and that the gains in gold are based on shaky foundations. This article explains why gold is not an ordinary safe-haven asset and supersedes the characteristics of fiat reserve currencies. Furthermore, this article identifies three catalysts which have yet to be fully priced in by the market. It is not the disconnect or irrational exuberance of financial markets which is causing gold to exceed record highs, but a logical set of drivers situated within the new financial world order.

A qualitative advantage: gold is not any other safe haven and has a special place in human society

Perhaps for the lack of more easily relatable vocabulary, gold has often been categorized as a safe-haven asset. This is perhaps due to the historically-based lure of the yellow metal, and its perception of a valuable commodity distinguished by its dominant use in jewelry as compared to other precious metals such as silver and platinum. Gold stands out not just through its immutable colour, sheen and malleability in crafting, but gold has a special place in psycho-social history. California’s Gold Rush in the 19th century and the Spanish empire’s expedition to South America in the 16th century are just two classic examples of humankind’s gold fever.

Today, gold continues to attract great attention but fortunately, both time and space have been conquered by technology’s facilitation of gold acquisition in cyberspace, unlike in the past. However, while gold is also traded on exchanges alongside other financial securities, gold is unlike other safe-haven assets. Its use as coinage in currency issued by sovereigns has its place long embedded within ancient history. Unlike other safe havens such as US Treasuries, gold is a natural physical asset that does not lend its credibility to the vagaries of sovereign governments and their associated political baggage. Therefore, gold as a store of value and mode of exchange lasts through the centuries, unlike the economic and geopolitical spaces of governments which have been drawn and re-drawn over time. While the US dollar plays an important role as the major reserve currency in the post-Bretton Woods system, it is only as important as the US government’s ability to maintain its political hegemony via the presently shifting foundations of today’s world order.

A major reason why gold is not as closely tied to our perception as a functional currency today was due to President Nixon abandoning the gold standard. Hence, it was then a choice between the dominance of the US Dollar versus the dominance of gold, and a war of narratives. The importance of the US Dollar remains a social construction. Today, we can see the foundations of that social construction crack, in a world with a more inward-looking US government as compared to the past, where the credibility of central banks and government chieftains are being questioned, and where Bretton Woods institutions such as the IMF and World Bank continue to draw heavy criticism over their inability to effectively manage the Great Recession and inability to moderate the Trump-led global trade war. The post Bretton Woods world and neoliberal concepts of economics, in its ineffectiveness, only serves to heighten concerns of present global institutions and places focus on Nixon’s reneging of the gold standard. Wealth inequality globally has only worsened over time and governments have not been managing this negative externality very well, if at all. Perhaps this is the reason why gold has gained ascendancy alongside the proliferation of cryptocurrencies and barter trade communities which reject the fiat currencies and the sovereignty of governments.

Quantitative evidence: the outperformance of gold compared to fiat currencies

The above discussion sets the stage for the longer term, historical, and socio-political insights for gold to continue with its upward trend. However, there are some quantifiable facts we cannot escape. First of all, gold has outperformed other G-10 currencies, many of which are safe havens such as the yen. The table below shows how gold has outperformed fiat currencies, many of which are highly regarded reserve currencies.

Performance % of gold against G-10 currencies over various periods, up till 30th June 2020.

12 mth

1 mth

3 mth

6 Mth

Norwegian Krone





New Zealand Dollar





Canadian Dollar





British Pound





Australian Dollar










Danish Krone





Swedish Krona





Japanese Yen





Swiss Franc










Source: Author’s calculations based on data from

Another perspective to consider is the performance of gold against the US Dollar index, which is apparently the ultimate safe haven today. The below chart from 1995 to 2019 illustrates that the US Dollar index essential rose and declined and made a similar U-turn over two cycles. On the other hand, gold outperformed the US dollar and more than tripled in value over the corresponding period.

Long term performance of the US Dollar index compared to gold price


While the risk-return profile ought to consider the volatility (or standard deviation) of gold price compared to other assets and currencies, the numbers may not be meaningful when the returns have been positively skewed. In other words, a standard deviation measures both upside and downside degrees of change, but returns on gold have been asymmetrically positive. Furthermore, if one believes that investing uncertainty has increased in recent times, much more than the past, the below chart characterizes the outperformance of gold during periods of uncertainty.

Outperformance of gold during periods of uncertainty and crises

Source: Barclays Capital, Bloomberg, Hedge Fund Research, JPMorgan, Thomson Reuters, World Gold Council, extracted from Amundi Asset Management investment insights blue paper, March 2019.

As such, the reach of gold has evolved from not just buyers of luxury goods, but is gaining increasing recognition by institutional investors that recognize its role as a portfolio diversifier. Much research has been posted on the World Gold Council’s website on gold’s ability to lower overall portfolio volatility while central banks have been increasing their strategic allocations and purchases of gold over the last couple of years. Furthermore, diversification has become increasingly important due to rising fat tails or the increasing chances of Black Swan events occurring.

Are the catalysts priced in?

The all-important question is whether the positive catalysts for gold have been fully priced in, and what could potentially maintain the uptrend of gold. The following are reasons why there is much room for upside in gold.

Catalyst #1: Emerging economies are also jumping on the quantitative easing (QE) bandwagon.

While QE and the associated expansion of money supply is no secret in the advanced economies, emerging market economies have also begun to issue new bonds and have their central banks buy these bonds in the market, all in the name of helping to stave off a pandemic-induced financial crisis. This has occurred as an increasing number of economies globally cut interest rates and look beyond the bottom of the zero interest rate boundary. The chart below illustrates the interest rates of advanced economies compared to emerging economies, which indicates a structural trend of declining interest rates. Furthermore, the interest rates caused by the 2020 pandemic-related crisis is lower as compared to the 2008/09 Great Recession.

Easy monetary policy today is unprecedented: average interest rates in the 2020 crisis sets a new record low for both advanced and emerging economies, and indicates greater policy accommodation as compared to the 2008/09 Great Recession

Note: AE – ten major advanced economies; EM – ten major emerging economies

Source: Author’s compilation and calculations based on BIS data

QE used to be thought of as plausible for only the advanced economies by virtue of their reserve currency status and strong sovereign risk profiles, which allows them to print money with negligible risk of capital flight. However, as interest rates decline and the prospects of zero and negative interest rates envelope all economies regardless of risk profile, emerging markets are also jumping on the QE bandwagon. Emerging market central banks from Chile to Indonesia are now experimenting with QE. It remains to be seen if such use of innovative QE would be tenable for emerging economies in the long run. The unprecedented broadening of monetary policy dependence on QE even for the emerging economies increases the relative attraction of gold versus fiat currencies on a global scale. Consequently, the deteriorating perception of sovereign risk has gone global. This simply places sovereign risk profiles and governments’ credibility on the line and is supportive of gold prices, an asset which is not fundamentally affected by idiosyncratic government and political risks.

Catalyst #2: Unprecedented size of fiscal stimulus in 2020

Not only is easy monetary policy being enacted with an unprecedented intensity, the fiscal expansion today far exceeds what was experienced during the Great Recession in 2008/2009. The chart below indicates that the fiscal deficit to GDP in both advanced economies and emerging economies is forecasted to be larger in 2020 compared to 2008/2009, while emerging market economies’ fiscal deficits will be larger by more than double, corroborating their use of asset purchases on the market.

This is a concern especially where the issuances of bonds to fund the battle against COVID-19 require both the issuance and purchase of bonds by the same government. Furthermore, the idea that the fiscal stimulus is primarily used for curbing further economic pain rather than building future growth capacity decreases the effectiveness and expected returns on such government spending. Today, stimulus appears to focus on direct cash transfers and force feeding banks with liquidity – this may partly help during emergency situations, but it remains an unfortunate mystery that economically viable projects such as infrastructure and education (e.g. student debt remains debilitating in the US) had been placed on the backburner, and government spending has largely been enacted as stop-gap measures when crises do occur, as we see today. As such, this decreases the debt sustainability of and the associated credibility of governments issued debt and currencies, supporting the relative markets preference towards gold.

Advanced economies and emerging market’s fiscal balance as a % of GDP in 2020 is larger than in the 2007/08 Great Recession, leading to the use of QE by emerging economies’ central banks and the expansion of global money supply

Source: Author’s compilation based on IMF data

Catalyst #3: money supply has expanded far more than the price of gold

An indicator that the present gold price is too low and can continue to rise past record highs can be seen on the following two charts regarding the monetary base and the Federal Reserve’s balance sheet expansion, which far exceeds the long-term uptrend in the gold price. From a relative perspective, this makes gold more valuable as compared to fiat money supply, which continues to be printed at unprecedented quantities. Apart from the US context, other countries in the G3 continue to expand money supply to record levels and continue to print debt at levels far greater than that of the US. As at June 2020, the US Federal Reserve’s balance sheet is just 32% of GDP, compared to 52% of GDP at the European Central Bank and 117% at the Bank of Japan.

Gold appears cheap relative to the massive expansion of money supply, as shown by the ratio of gold price to the monetary base (based on St Louis Fed’s data)


Furthermore, the next chart shows that the change in gold price has not kept pace with the US Federal Reserve’s sharply higher balance sheet expansion in 2020. As depicted in the chart from 2004-2019, there is a roughly mirrored correlationship between the gold price change and the Federal Reserve’s balance sheet size change. Over time, it would be logical to expect that the gold price would eventually rise further to at least more closely reflect the Federal Reserve’s balance sheet expansion and the general expansion of central bank balance sheets in other major advanced economies.

Gold appears undervalued: the monthly % change of gold price in 2020 has lagged the Federal Reserve’s monthly balance sheet % expansion



As earlier discussed, the main reason for gold being unable to fully realize its value potential was due to the socially constructed suppression of gold which has suffered at the behest of the US Dollar, the system of fiat currencies, and its associated supranational monetary institutions following Bretton Woods. Today’s increasingly democratized nature of financial markets cyberspace (e.g. access through ETFs, and inflows here have reached a record high) and the growing wealth of emerging market buyers, especially in China and India, have widened and deepened the distribution networks to reach gold buyers at all corners of the globe. Unlike the more specialized nature of financial securities, gold is easily understood given its visibility and long-established history, reaching the mass markets at all levels of education and thereby widening its reach and intensifying its access to savings-rich and developing markets. Hence, gold would no longer cater to just the rarefied strata of society, but will realize the full potential of its valuation as gold is not owned only as a luxury, but as a basic investment and core holding of every portfolio.

Apart from the qualitative appeal of gold and its illustrious history in human society, gold is structurally important as a diversifier to investment portfolios and has demonstrated positively skewed returns, which is a major reason for the record inflows to ETFs and the consistent trend of central bank purchases. However, after outperforming its previous record high and having recently experienced some profit-taking, doubters would question if the rally could continue. In this regard, this article has highlighted three catalysts for gold which have yet to be priced in and fully placed into context by the financial markets: (i) apart from advanced economies, emerging economies are also jumping into the QE bandwagon, which erodes the value of fiat currencies on a global scale; (ii) fiscal stimulus to support the 2020 crisis is far larger than the stimulus used to address the 2007/08 Great Recession; (iii) the growth of money supply and associated QE is far larger than the growth rate of gold price, and historical correlationships suggest that the price of gold should play catch-up with this global growth of money supply. Investors should take heed of the present tailwinds supporting gold and buy on dips, as the uptrend would likely continue over the long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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