Since this summer, the topic of inflation has been as relevant as it has never been since the 1970s. One would assume that gold will rise due to its hedging properties against the depreciation of fiat currencies.
But there were also a number of counter-deterrents, including the US stock market, the dynamic economic recovery in the United States, the strengthening of the US dollar and rising capital market returns. The reversal of the trend in real yield was one of the main reasons why the gold price was unable to continue the uptrend that began in 2020.
Moreover, market participants, especially in the US, had been expecting a reversal in interest rates from the middle of the year due to the rapidly rising inflation rate, which was disastrous for interest-free gold. At the same time, the stock market offered a better alternative in terms of profitability. This inevitably attracted a significant amount of capital.
More money entered the stock markets in 2021 than in the last 20 years combined. It was one of the best periods in history, especially for US stock indices. Gold, along with bonds, fell prey to this unorthodox turn of events.
Unlike the price of gold, the global stock market index (MSCI) did not lose momentum after falling to a low due to the coronavirus, which suggests that stocks are better suited to hedge inflation than gold. Some stocks do perform this protective function, but not all: only stocks of companies that could boldly raise their prices and / or owned scarce resources and materials. However, other stocks, whose margins are sandwiched between surging buying prices and lagging selling prices, do not have good inflation hedge.
In this regard, the development of some indices is not indicative of all stocks due to the large weight of individual stocks, such as Apple or Microsoft. Since most of the fresh investment money has flowed into index products, investors have been able to achieve higher returns this year from stock indices than from gold.
The strengthening of the US dollar as a competitor to gold also put pressure on the value of the yellow precious metal. The US dollar index, which measures the dollar against a basket of the world's strongest currencies, is up nearly 7% this year.
On the one hand, the strengthening of the dollar was due to the expectation of an increase in interest rates in the United States and due to the amazing strength of the American economy. The latter is likely to change again soon in the absence of government checks, which have greatly increased American income.