In theory, it would be hard to imagine better circumstances for gold. Yet, gold prices have been persistent laggards. YTD, it's down 10%. This is a stark contrast to its performance last year during the spring and summer.

Like all assets, gold plunged during the liquidation as the coronavirus threat became apparent. However, it was one of the first to rebound and make new highs on the prospects of high deficits and easy monetary policy. It topped in August at $2,089 and since then is down 18%.

Bullish Conditions for Gold

This poor performance is certainly puzzling as conditions for gold remain bullish by many measures. Interest rates are set at zero, and the Federal Reserve has clearly signalled that this won't change until 2022 at the earliest. Further, it's raised its threshold for when it would even start to consider raising rates.

The federal government is enthusiastically embracing deficit spending with a $3.7 billion deficit in 2020 and an expected $2.3 trillion in 2021. Just like the Fed, there's been a paradigm shift in the federal government's willingness to support the economy with less credible resistance from deficit-scolds.

Reasons for Underperformance

Many gold bulls were expecting a similar performance like 2009 to 2011 as gold eventually climbed more than 150% due to an improving economy, dovish Fed, and high deficits. Yet, there are some differing factors. Economic fundamentals are much stronger than in 2009 in terms of incomes, consumer spending, household balance sheets, and the labor market. Further, there's much more stimulus in the pipeline that will support growth.

Thus, it's likely that monetary policy and fiscal policy have already hit the inflection point in terms of their largesse. Another factor in gold's weakness is the more calm political situation. Currently, economic optimism is increasing with the steady vaccination pace and the improving economy.

Another potential factor is that gold tends to trade at a premium to its underlying fundamentals when political risk increases. Although we had a contested election and the events of January 6, the worst seems to have passed, and tensions seem to be waning.