The yellow metal has seen a lot of volatility recently. The prices reached an all-time peak of $2069 per ounce on August 6, 2020, and from there corrected to $1680 levels in March 2021.

The yellow metal has seen a lot of volatility recently. The prices reached an all-time peak of $2069 per ounce on August 6, 2020, and from there corrected to $1680 levels in March 2021. The volatility is stark if we consider the recent movement where the prices corrected about $80 between August 5th and August 8th before rebounding to the current $1750-75 range. But, over a period of 1 year, Gold has mostly been in a range between $1700-1900 per ounce, if we ignore the occasional brief spikes and dips. The short-term volatility and ‘mini crash’ have led to some panic among investors. But, we should focus on the big picture and not on short-term fluctuations.

Conventional wisdom would paint a grim picture for the Gold prices. Biden’s stimulus would trigger an economic boom even as output would be constrained by supply chain disruptions and labor shortages even as Fed is printing trillions of dollars in new money. The result would be both demand-pull inflation from easy money and cost push inflation from shortages. The combination will cause higher prices resulting in higher interest rates to control inflation. Thus, resulting in stronger dollar and hence lower dollar price for Gold.

But, is the relentless printing of new money moving to the new economy or stuck in excess reserves in Fed? The economic headwinds is resulting in a higher savings rate and the fiscal stimulus doesn’t seem to have the stimulative effect as intended. The multiple ‘waves’ of pandemic and resultant lockdowns are not helping the pace of recovery. Also, the supply disruptions seem to be more temporary and transitory and there are some signs of the same clearing up.

The altering counter-narrative of ‘inflation’ and ‘disinflation’ have carried on like a tug of war and it explains why Gold has been moving in a range for the past one year. The same is the case with treasury notes which have also moved in the range of 1-1.75%. Both, Gold and Interest rates have moved inversely within their respective range for the past year.

Gold prices typically show a much stronger inverse relationship with TIPS yields. TIPS (Treasury Inflation-Protected Securities) bond is Treasury bonds yield minus the rate of expected inflation which are effectively yet simple instruments to eliminate one of the most significant risks to fixed income investments: inflation risk. TIPS bonds yields has turned negative since Jan 2020. The negative 1.18 in recent times has been the lowest in a decade. There has also been sharp rise in net contracts, negative-yielding debt, and US VIX. Thus, Gold can act as a hedge against spiking inflation and volatility.

(Rajesh Cheruvu, Chief Investment Officer, Validus Wealth. Views expressed are the author’s own.)