This came about due to the weak economic outlook stemming from the coronavirus which caused inflation expectations to plummet. At the same time, the Fed pushed down interest rates to zero and started a variety of programs to boost liquidity in various markets to ensure that no liquidity issues were exacerbating the slowdown. As a result, the drop in real interest rates fueled buying in precious metals.
However, this state of affairs changed when a vaccine was introduced which caused inflation and growth expectations to start rising. Eventually, interest rates started moving higher. This recovery is being confirmed by economic data like employment, industrial production, and consumer spending and looks to be supported by trillions of fiscal stimulus in the pipeline.
Essentially, improving economic data is bearish for gold especially when it causes interest rates to start rising faster than inflation.
Signs of a Bottom?
Gold dropped about 20% from its 2020 peak before finding a bottom earlier this month around $1670. Since then, it's climbed about $100. This move has come about as rates have backed off due to rising case counts in many parts of the world. Additionally, the drop in case counts has plateaued as well.
This is creating doubt that the world will be able to return to normal by the end of the year. The ideal conditions for gold would be a weakening growth and rising inflation. While growth expectations may have softened, it seems unlikely that it will be enough to offset the economy's trajectory. Additionally, investors in gold don't seem to believe that a new inflation regime is here. They seem to be of the mindset that this spike in inflation is transitory due to supply chain issues.
Given this headwind for gold, it should be treated as a trading vehicle rather than an investment. It seems that gold has been displaced by bitcoin as an inflation hedge. If interest rates decline, investors may elect to sit in bonds or cash as these don't have the same downside risk as gold.