While 25 central banks around the world are easing monetary policy, debates about competitive devaluation and currency wars are reigniting. Yet gold prices remain at the lows of the last five years. What gives? You would think that a zero yield on gold would be more attractive than negative yields on German government bonds (out to seven years) and Swiss government bonds (out to 12 years).
We have written about how gold should maintain its inflation-adjusted value over time and, therefore, the biggest driver of gold prices should be changes in real yields (nominal yield minus expected inflation) on government bonds. This is why gold fell nearly 50% as yield on government debt rose sharply during the “taper tantrum” in 2013. However, as central bank actions are causing real and nominal yields to fall, gold prices today have stayed low. What’s causing the disconnect?
We think it’s sentiment. Back in 2012, gold was the asset that couldn’t go down; it had rallied for 11 years in a row. You had to be a fool not to own it. But price declines since 2013 and today’s dollar strength versus other global currencies are weighing on sentiment for gold.
We see this as an opportunity to buy. Not because gold is a magic yellow piece of metal that goes up, but because it’s a long-duration real asset that, over the last 12 months, has gotten cheaper both in absolute and relative terms.
Read more about how PIMCO views gold prices HERE.