That hitherto slightly unreliable port in a storm, spot gold (XAU/USD), is looking that much lighter than its underlying physical commodity in February. But what’s supporting the gold price today is exactly what should have supported the gold price last August, when we briefly got a taster of the sort of equity market volatility that’s been the norm thus far this year.  So why the turnaround?

‘Oh, well, it’s because there’s a lot of global economic worry about,’ is what most people are still saying. And they’re right, but there was a lot of that about last year too when the gold price was less than shiny. In 2015 we wallowed in above zero interest rates (I know – ABOVE ZERO!) and fought a rampaging US Dollar that tracked the US central bank’s desperation to raise rates. With no inflation to hedge against, Gold had little option but to queue up for its giro.

In December, when the US Fed ignored the fundamentals and went ahead with the first US rate hike since what’s now termed ‘The Great Recession’ (which confuses the hell out of people like me, who learnt about a very different Great Recession at school), we all believed it knew what it was doing and gold remained dole-bound. It’s of little use in an investment sense when the above mentioned drivers are driving in the wrong direction, but the gold price today is evidence that they’ve made that U-turn the sat-nav’s been banging on about for six weeks.

In December, we thought that China must have been back on track to maintain exponential growth indefinitely (which is possible because of infinity, apparently), European markets were again healthy enough that the ECB didn’t have to do more QE and Japan’s own SUPER-QE had finally worked perfectly, because surely the US Fed wouldn’t tighten without a rosy global outlook, right? Kinda wrong, as it turns out.

Gold was out of favour because everyone trusted the central banks to come to the rescue, and do it properly. When they couldn’t find a good reason for the Fed putting the US economy in a place that’s less at home to economic growth, they made a note in their diaries along the lines of “1 Jan: Sell everything and buy gold.” Then they headed home for Christmas.

The chart-twitchers among you will likely have discussed at length the appearance through January of that rarest of species, the saucer bottom reversal. It shows beautifully the slow, steady unwinding of positions in more risky assets and the corresponding move into the safe haven Gold. But we’re still on the potter’s wheel – like Patrick Swayze and Demi Moore in the film Ghost, the clay-smothered hands of a weakening US Dollar and negative interest rates are together coaxing our saucer into more of a salad bowl.

The gold price today (meaning more or less around now) has benefitted hugely as investors unwind the bullish bets they wagered on the banks and financials last December, and remains spurred by two factors that resulted from the Fed’s near admission that December’s rate hike was a bad call. Firstly, remember the reason it held off in September? Well, the same reason’s cropped up again to effectively delay any further action by the US central bank: Lots and lots of market volatility. Secondly, investors are finally abandoning the US Dollar. Thirdly, the spread of negative interest rates makes an asset that yields nothing in terms of income suddenly appear really rather attractive.

Last of all, Gold’s once again proving a very effective hedge. Not against inflation – that’s nowhere to be seen – but against implosion.

Augustin Eden, 12 Feb