Anybody who'd hoped that uncertainty and higher inflation expectations would boost the gold price has been disappointed in the past few weeks. Although the election of Donald Trump has increased both uncertainty and inflation expectations, gold has fallen 7 per cent in US dollar terms since early November. In truth, though, this shouldn't be a surprise.
The gold bulls were, in a sense, correct. Uncertainty usually is good for gold. The best measure of this is perhaps not so much the Vix index, which measures short-term equity risk, but the index of policy uncertainty complied by Scott Baker, Nick Bloom and Steven Davis. There has been a strong correlation between this index and the dollar gold price - of 0.6 between January 2003 and October 2016.
The gold bulls were also right to believe that gold should do well when inflation expectations rise. If we measure these by the gap between five-year conventional US Treasury yields and their inflation-proofed counterparts, they are indeed positively correlated with the gold price, if we control for other things.
All this poses the question: if the bulls were right in these respects, why has gold fallen?
Simple. It's because two other things have outweighed these bullish factors.
One is that the US dollar has risen. And it has usually been the case that rises in the dollar have depressed the dollar price of gold. One reason for this is simply that if the dollar rises, holders of other currencies find that they can buy less gold for given amounts of yen or euros. And this depresses demand for gold and hence its dollar price.
But there's something else. Since Mr Trump's election, real interest rates have risen, as measured by the yield on five-year inflation-proofed bonds. Higher real yields tend to cut the price of gold.
One reason for this was pointed out way back in 1931 by Harold Hotelling. He showed that the expected future price change of a commodity should be equal to the interest rate. This is because if interest rates are high, miners will extract lots of the commodity so they can buy high-returning assets or pay off expensive debt. That will depress the present price of the commodity, to a level from which it is expected to rise. Conversely, if interest rates are low, there will be less production so prices will be high. This implies that a rise in interest rates will depress prices.
A second reason is simply opportunity cost. Gold competes for investors' money with cash and bonds. When bond yields are low, gold is attractive simply because you don't forego decent returns on bonds if you hold gold instead. When bond yields rise, however, the cost of holding gold rises: you are giving up higher returns on bonds. That means that gold prices should fall when yields rise.
And this has been the case historically. Between 2003 and October 2016, there was a massive negative correlation, of minus 0.84, between gold and the yield on five-year inflation-proofed Treasury bonds.
What we've seen in the past month is, therefore, something entirely consistent with both history and theory. Gold has fallen because real bond yields and the dollar have risen. And these factors are strong enough to outweigh the benefits to gold of higher inflation expectations and greater uncertainty.
This does not, however, mean investors have been wrong to hold gold. Quite the opposite.
The case for gold has long been that it is insurance. Back in February, I wrote that gold's attraction lay in the likelihood that it would do well if interest rates became more negative. Such insurance was worth having because a world in which rates fell would quite likely have been one in which the global economy was weak and so equities were doing badly.
But, of course, there's a problem with insurance: it loses you money if the risk doesn't materialise. And this is exactly what's happened recently. Mr Trump's promise of a big fiscal stimulus has reduced the risk of low bond yields, so we've lost money on insurance against that risk.
For anyone with a balanced portfolio, however, this loss on gold has been tolerable because it has come at a time when equities have done okay. Gains on shares should, therefore, have offset losses on gold.
And herein lies the case for continuing to hold gold. It's possible that real interest rates and the US dollar will fall back - either because the global economy disappoints expectations again or because investors fear that Mr Trump's anti-globalisation agenda will depress long-term growth.
In such circumstances gold might well recover. And such a recovery would be welcome for investors, because in such circumstances equities might well do badly.
Of course, this is only a risk. If global growth picks up and bond yields rise, gold would probably fall. But in such a world, gold's losses might well be offset by gains on equities, so they would be tolerable.
The case for holding gold as a means of spreading risk is, therefore, still a good one.
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Chris blogs at http://stumblingandmumbling.typepad.com