THE price of gold has surged 15% so far in 2016, the best start to the year in over three-and-a-half decades. Some of the rise can be attributed to fundamentals, including cuts in production, increased demand from India and China, and low, or even negative interest rates which make gold more appealing as a store of value. But market psychology is likely the biggest factor contributing to gold’s rally. Investors have historically viewed gold as a “safe haven” in times of turmoil . This year, as markets tumbled in January and the first half of February, investors have piled into gold.
Historically it is a strategy that has generally worked, but not always, such as during the 1980s and 90s when gold prices were floundering and treasury bonds became the safe haven of choice. Unlike other commodities such as oil, the price of gold tends to rise in response to negative stockmarket shocks. Research from the IMF finds that bad news about economic indicators like employment and industrial production can also cause the price of gold to jump. A recent study by the Federal Reserve Board confirms the widely-held view that when markets are volatile, and investors are feeling fearful (they might say “risk-averse”), gold tends to outperform. Such “flights to safety” also cause safe-haven currencies like the yen, the Swiss franc, and the dollar to appreciate. Gold, for its part, may be a “barbarous relic” as the English economist John Maynard Keynes famously said, but it remains a shiny sanctuary in the darkest times.