Investors turning to gold for liquidity
16 Mar 2020The price of gold, a safe-haven asset, fell below US$1500/oz on Monday 16 March as investors sold the precious metal for liquidity last week to cover their losses in equity markets. Something similar happened during the global financial crisis when gold prices initially fell in October 2008 alongside equities. By November 2008, the gold price started an upward rally, that ultimately saw it rise 170% by August 2011.
Gold back to a seven-year high
06 Mar 2020After a temporary dip, gold is back to a seven-year high (US$1688/oz). 10-year US Treasury Yields have fallen to an all-time low (0.77% at the time of writing) after the US Federal Reserve cut rates earlier in the week. The Bank of Canada and Reserve Bank of Australia have also cut rates this week, while a number of governments and supranational organizations are drawing up blueprints for support/stimulus. Comments from other central bankers have become markedly more dovish this week. A raft of Purchasing Manager Indices reports laid bare just how badly the global manufacturing sector has been hit by the disruption to supply chains. As we noted in “Has the Black Swan Landed?” gold is potentially one of the best hedges to these highly unpredictable events. Gold in Exchange Traded Products have hit an all-time high of 85mn troy ounces and net speculative positioning in gold futures have also hit levels never seen before.
Our models indicate that if the current situation of extremely low bond yields, elevated positioning in futures and inflation above 2% persists for the remainder of the year, we could get gold trading above US$2000/oz by the end of the year. That would mark an all-time high.
After strong rallies and stretched positioning, gold often takes a pause. If stocks experience another violent downdraft, gold could be sold to meet margins (as we suspect happened last week).
US Fed’s surprise rate cut lifts gold
05 Mar 2020When the US Federal Reserve provided a surprise cut in interest rates on 3rd March 2020, gold rose 3.3.% after the announcement. Gold has recently been supported by low interest rates and the 10-year US Treasuries recently fell below 1% for the first time. Unfortunately, with Fed hitting the “panic button”, equity markets were spooked and the S&P 500 slipped 3.5%. Last week when gold was falling alongside equities some had doubted gold’s “safe haven” credentials. In reality what was happening was that gold was being sold as a liquid asset to meet margin calls on equity futures. It was being utilised as a liquid, cash-like asset. Gold is now rising again this week as while cyclical assets are still falling.
Central banks continue to buy gold in large volumes
17 Feb 2020Data from the World Gold Council confirmed that Central Banks continued to buy gold in large volumes in 2019. Just shy of the 656.2 tonnes 50-year high water mark reached in 2018, central banks bought 650.3 tonnes in 2019. 15 central banks increased their gold reserves by one tonne or more in 2019 – highlighting the breadth of buying. In the past ten years emerging market central banks have been keen to diversify their foreign currency reserves, especially away from the US Dollar. They also have also highlighted gold’s virtues as a hedge against financial market turbulence. The largest buyers were Turkey, Russia, Poland and China.
Gold and Dollar appreciate at the same time, indicating safe-haven demand
17 Feb 2020Usually the US Dollar and gold (in dollar terms) move in opposite directions. That is a long-term relationship that is confirmed in WisdomTree’s gold model. However, when investors are seeking safe-haven assets, they can move in the same direction. Both the US Dollar and gold are seen as safe-haven assets. Since the beginning of this year, the US Dollar basket (DXY) has appreciated 2.8% and gold has risen by 1.2% (source: Bloomberg spot prices 14/02/2020). Gold had started to rise before the Dollar, so when looking at price appreciation since the beginning of December 2019, gold is currently up 7.6% compared to 0.85% for the Dollar basket (source: Bloomberg spot prices 14/02/2020).
Gold remains in favour as coronavirus drives market uncertainty
12 Feb 2020Gold, often seen as port of call in times of uncertainty, has remained in favour this year. Other commodities like oil and base metals have suffered from fears of demand destruction from lower economic activity from the world’s largest consumer of commodities. While jewellery consumption in China is likely to fall, global gold demand (especially investor markets) are likely to remain very strong in the face of the economic uncertainty that the virus has brought. Speculative positioning in gold futures have remained at an elevated level - above 300k contracts net long - since the beginning of the year and gold held in exchange traded products has hit an all-time high (surpassing the 2012 peak).