Gold investors are having a rough time so far this year. But the reasons for the asset’s poor performance are likely not what you think.
Year-to-date the SPDR Gold Shares GLD exchange-traded fund, which tracks the price of bullion, is down 5.7% compared to gains of 4.7% for the S&P 500 index, according to data from Yahoo.
That’s a double digit performance gap in a little over six weeks.
What happened?
In the first place, it wasn’t the popularity of cryptocurrencies such as Bitcoin, which is a small market and has not been massively embraced by the investment community so far. And it wasn’t that investors have soured on the metal — investors have been snapping up the metal like crazy, according to World Gold Council data.
What really happened is that the U.S. dollar has strengthened over the past few weeks and that matters because the price of gold tends to go down when the greenback is strong. It works vice versa.
Dollar Reverses Its Recent Weakness
So far this year the dollar index, which measures the strength of the greenback against major currencies, has risen around 1%. That increase coincided with the 5.7% decline in bullion prices. (Again, more real world proof that gold prices move inversely with the value of the dollar.)
The change is a stark contrast with what happened last year when the dollar weakened by 14% and bullion prices rallied by around 27% over the period March 20 through year-end, again according to data from Yahoo.
Put simply, the weakness in the dollar that was seen last year was caused by the extraordinary money printing efforts by the Federal Reserve.
But now that flight from dollars has now given way to optimism about the U.S. economic recovery. In part the bullishness on the U.S. is due to the likely massive stimulus efforts that are expected to get passed at the behest of the Biden administration.
The massive stimulus which far outweighs anything out of Europe should mean that the U.S. ends up recovering stronger and faster than the does the European Union.
Other important factors in the optimism about the U.S. is the conciliatory approach toward China and Iran being taken by the Biden administration. While that tact may backfire over the longer term, in the meantime the markets see less sign of trouble and hence less need to buy bullion.
In the meantime, don’t expect the dollar rally to stop anytime soon.
This article originally appeared on Forbes.
