Financial Times: Gold's Evolution Into a 'Must-have' Asset is Storing Up Trouble

Article by Mohamed El-Erian in Financial Times

Until recently, the rapid rise in the price of gold had more to do with opportunistic financial trading than any larger structural investment theme, let alone a drop in physical supply or an increase in industrial use.

Now, the metal is seen to offer something for everyone. That is yet another unintended result in a lengthening list of the exceptional involvement of central banks in the functioning of markets. Their expanded interventions to counteract the effects of the pandemic have pleased many now but will create problems for the central banks and the economy at large, if a sharp and lasting economic recovery continues to elude us.

After rising 17 percent in the first half of the year, gold prices surged to record highs before retreating on Tuesday to just below $2,000. In the process, investors went from treating gold as a short-term momentum trade to seeing it more as a legitimate standalone option in long-term portfolios. You need only look at real yields on government bonds after adjusting for inflation to see why so many investors are buying gold as a long-term option.

Contrary to what most textbooks would suggest, the recent drop in nominal yields has coincided with a rise in inflationary expectations. This makes gold a more attractive substitute for government bonds in two ways ...

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