Did gold prices bottom or was this a dead-cat bounce?

Note: all valuation references are in US dollars

Between February and May 2020, the US Federal Reserve quadrupled the money supply (M1) from $4.0 trillion to $16.2 trillion. This unprecedented amount of money creation was bullish for gold, which soared 36% from $1,519.50 at the end of 2019 to a peak of $2,070 on 5 August 2020.

However, money printing wasn’t the only thing sending gold prices up.

Gold prices tend to rise as interest rates fall, and vice versa. In this respect, gold prices tend to track the US 10-year treasury bond.

In the first half of 2020, long-term interest rates fell rapidly, sending bond prices up, peaking in July, just before gold peaked. Treasuries fell sharply in 2022 as the Fed raised interest rates, finally bouncing 3.6% off its 8 November low.

Gold also jumped from a low of $1,617 on 3 November to $1,741 on 29 November.

So where next for gold? Two questions may be pertinent:

1. Will bond prices continue to rise?
2. Will gold prices follow?

• Will bond prices continue to rise?

With 10-year treasury yields at 3.75% as of 30 November and the 1-year yield at 4.8%, the yield curve has become inverted. This is significant because every time the 10-year/1-year spread inverted in the past 60 years, it was followed by a recession.

Even without understanding the precise mechanism behind this, it’s safe to say that what happened after each of the past seven times since 1965 could happen again.

Similarly, looking at a chart of 10-year treasury yields superimposed on recessions, yields on 10-year treasuries fell in seven of the past eight recessions. Again, it’s possible that history could repeat itself.

• Will gold prices follow?

Gold is a special commodity in that demand is driven by sentiment rather than economic need. Jewellery and investment account for the lion’s share of gold, with industrial uses for gold accounting for just 330 tonnes in 2021. With mine production of 3,531 tonnes, the above-ground supply of investment gold and jewellery rose by 3,201 tonnes.

According to the World Gold Council, approximately 205,238 tonnes of gold have been mined throughout history, and nearly all of it remains available (i.e. not lost). If so, then the addition of 3,201 tonnes dilutes the total by approximately 1.5%. If demand were constant, or grew in line with world population growth of 0.9%, then gold would fall in value.

On the other hand, compared to the increased supply of US dollars of over 300% (and similar increases in other currencies), a dilution of 1.5% seems rather low.

Another way of looking at it is that at $1,760 an ounce, all the gold ever mined is worth $11.6 trillion – slightly less than the amount of US dollars created in 2020.

Based on this analysis, the amount of US dollars per ounce of gold appears to have at least doubled.

If the US is indeed heading into a recession and the Federal Reserve decides to lower interest rates, then it’s possible that 10-year treasuries could rise and that gold prices could follow. At least, that’s what appears to have happened during the 2009 recession.

How to profit from rising gold prices

There are six ways to get exposure to gold:

• Bullion
• Spot gold
• Gold futures
• Gold options
• Gold ETFs
• Gold stocks

Find out more on how to trade or invest in gold.

In addition, it’s possible to trade ETFs and stocks using contracts for difference.

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