Gold has rallied 27% over 12 months, outrunning all other traded commodities in this Covid-stricken year © Bloomberg

Like the metal itself, reasons to buy gold are malleable. Own the yellow metal for its untarnishable beauty, or as a store of value, or both. Jewellery is the largest stable component of demand. But when gold soars, as at present, bling starts to lose its zing. This can presage a price drop.

Demand for gold as an investment had outstripped purchasing for jewellery manufacture just three times in the past decade. That was until the last quarter. The switch suggests a speculative bubble is building.

Gold has rallied 27 per cent over 12 months, outrunning all other traded commodities in this Covid-stricken year. The push has been driven by anxious investors snapping up gold bars, coins and exchange traded funds. Jewellery retailing has meanwhile been obstructed by the closure of shops and postponements of weddings, a trigger for purchases particularly in India. These problems should be only temporary.

Chart shows gold demand and price showing investors drive gold’s rally

Bulls will offer as many reasons to invest in gold as there are carats. One of these is that the metal — primarily traded in dollars — performs well when real US interest rates (adjusted for inflation) decline. That has happened this year, as reflected in the collapse of US bond yields. Since 2006, for every one percentage drop in real US Treasury yields, gold prices have increased by about a fifth according to Citi. The debasement of fiat currencies by central banks and world instability are other reasons for gold bugs to hoard the stuff.

There is a case to be made that the metal is now overbought. Real annual gold price returns are again approaching those in the 2008-11 bull run, which were in the 20-25 per cent area, after which gold slumped.

Perhaps the best reason to question gold’s rally is that it is hard to find bearish commentators these days. Even crotchety Lex became a cheerleader early last year. The current rally is yet young — less than two years old. But if economies show signs of sustained recovery, expect gold to take a hammering.

The main chart has been corrected to reflect the correct data for jewellery and investment demand.

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