I know, everyone likes being bearish these days because they’ve all watched The Big Short and think Credit Default Swaps are cool. But I’m somewhat bemused that, after a decent couple of weeks for both equities and commodities, everyone’s asking me this  –  “Gold: when will it crash again?”

Clearly there’s no pleasing some people.

The answer is pretty simple really. The gold price goes up when people are worried and uncertain. Gold has competition in the ‘safe haven investment’ sphere – lots of it. Currencies like the Japanese Yen and US Dollar are also highly sought after ports in a storm and the strange behaviour of the Yen recently illustrates this perfectly.

In January the Bank of Japan adopted negative interest rates (see this blog post for more on those) to complement its 20-year-old super-QE programme that had thus far failed to weaken the Yen sufficiently to boost the country’s equity markets. If it ain’t fixed, don’t broke it. The aim of this was to try to get those pesky safe have seekers to look elsewhere by charging them to park their funds in Japanese government bonds. On the flipside, a weaker Yen should encourage the rest of the world to buy Japanese products.

Unfortunately though, the wider investment community preferred to concentrate on the underlying reasoning behind the move – continued global economic woes stifling growth. The safe-haven Yen strengthened considerably, biting the BoJ on the behind. Clearly, if things are that bad, then people are willing to pay to moor up in a safe haven.

But this is where Gold’s competitive advantage shines through. The more cost-conscious among us might look at Gold, a non-interest-bearing investment and think ‘zero yield is better than a negative yield.’ They’d be right. That, in part, is why Gold has had such a good year to date.

What could cap Gold’s gains, then? Demand for gold comes in part from those wishing to hedge themselves against inflation. In times of high inflation stocks and bonds tend to underperform hard assets like gold, oil and other commodities. With low inflation, the opposite is true – gold will underperform stocks and bonds. So gold should be underperforming right now.

The problem is, of course, that interest rates are very low which when combined with currently low inflation puts markets in a rather strange situation. Add to this the weaker US Dollar – a direct result of low US interest rates – making gold, which is priced in US$, cheaper to those using other currencies and we find ourselves yet again bullish on the gold price!

This, in an economic climate that’s been engineered by central banks rather than pure market forces, makes our crystal ball somewhat opaque.

So to those that are asking the question ‘Gold: when will it crash again?’ I say this: ‘I don’t know.’ Ironic as it may seem, Gold does well when everything else does bad. Given the ideal conditions, that also means that when gold is expensive, stocks and shares are cheap – but current conditions are far from ideal.

Augustin Eden, Research Analyst (18 March)