Commodities & Metals

World Gold Council Expects Higher Prices Ahead

Since mid-June, the price of gold has dropped by more than 7%, and for the year to date, the yellow metal is down by 3.8%. Gold prices rose $1,829 in the month of May (8%), but more than half that gain is gone now.

According to the latest Gold Market Commentary from the World Gold Council (WGC), August may be a good time for investors to “position for the historically strong September gold performance.”

The WGC notes that the “opportunity cost of investing in gold continues to improve as the real earnings yield plus the dividend yield of the S&P 500 has reached negative territory for only the second time in 75 years.” Additionally, with both the Federal Reserve and the European Central Bank placing more emphasis on employment and less on inflation, the central banks’ bond-buying could be prolonged.

Opinions vary on whether recent high inflation figures are transitory or permanent. In an interview Wednesday, JPMorgan Chase CEO Jamie Dimon does not believe inflation is transitory. He also said that he believes that once the unemployment rate drops to 4.5% the Fed will begin to reduce (taper) its bond-buying. The sheer size of the federal deficit, “by itself almost has to be inflationary,” Dimon said.

Fed Governor Lael Brainard commented last week that the Fed’s decision to taper “will depend importantly on the accumulation of evidence that substantial further progress on employment has been achieved.” Brainard added that she expects to be “more confident in assessing the rate of progress once we have data in hand for September, when consumption, school, and work patterns should be settling into a post pandemic normal.”

Regarding claims that Bitcoin could replace gold as the “ultimate store of value,” the WGC compared the beta between equities and both gold and Bitcoin. Beta measures the systematic risk (volatility) of an asset compared to the market as a whole. The council concluded that Bitcoin’s beta to equities is “much more emblematic of a risk-on asset” than is gold, historically a risk-off asset. One can infer that gold is, therefore, a safer store of value.

The WGC bases its expectations for a September rise in gold prices on historical trends that drive a confidence level of nearly 90% for such an increase. There are two primary reasons for the increase: strong demand resulting from the wedding season in India and other festivals in the following months and “higher global investment activity following typically quieter summer months.”