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Why is gold underperforming despite Covid induced global uncertainty and inflation?

ICICI Securities 29 Dec 2021

What's Buzzing:

Why is gold underperforming despite Covid induced global uncertainty and inflation?

Context:

Since September 2020, gold prices have underperformed compared to other asset classes. Gold prices declined from $2120 making a low of $1678 last year. While rest of the asset classes witnessed significant upsides, gold has been hovering around $1800 levels for the last few months.

Our Perspective:

There are two primary drivers of gold price i.e. inflation and global uncertainty. Inflation, globally, is inching up. In the US, inflation remained above 5% for five consecutive months. Even the price pressure was felt in other major countries like Europe and the UK. In Europe, inflation accelerated to its highest level in 25 years while in the UK inflation hit a 10-year high. However, it is still benefitting gold as most of the inflation is mismatched demand supply of product and logistics induced by Covid. Global uncertainty, on the other hand, is reducing as the global economic growth is improving prompting central banks to purse accelerated tapering. Also, gold lost some of its shine to emergence of cryptocurrencies like Bitcoin, among others. However, gold is still attractive as an alternative investment and is a good hedge against global uncertainty given the new Covid variant Omicron. Also, global inflation can become sticky as highlighted by some central banks recently. Apart from that, investment in bitcoin and other cryptocurrencies is more speculative and carries the risk of illegitimacy. Even the Reserve Bank of India has raised concerns over cryptocurrencies posing macroeconomic and financial stability risks.

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