World Gold Council Q&A

Discussion in 'Gold' started by mmm....shiney!, May 20, 2022.

  1. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    Taken from their latest blog.

    1. Given both equities and bonds have been declining, should gold have performed better than it has?

    Gold has proven valuable for investors given the broader macroeconomic context. It remains one of the top-returning assets year-to-date, especially for non-US dollar investors. It has also done significantly better than would be expected based on real rates and the dollar. Furthermore, when put in context of asset performance over the past three years, it has protected capital and served as a source of liquidity.

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    Gold has outperformed what simplistic models suggest. A commonly used model based solely on the direction of the dollar and real rates suggests gold should have been 21% lower than it is now (Chart 1). But last year we highlighted the pitfalls of relying on such a simplistic approach. Why? First, gold’s correlation with the dollar is not always negative. We’ve seen this correlation flip to positive over the past few months – as it has done in the past. Second, rising interest rates can make gold less attractive if they raise the opportunity cost or reflect higher economic growth ahead. Neither of those appear to be true at present. Growth expectations are falling and the opportunity cost – correctly viewed in real terms – remains historically low.

    [​IMG]

     
  2. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    2. Will Fed rate hikes temper the appetite for gold as a safe haven?

    At its most recent meeting on 4 May, the Fed raised interest rates by 0.5% and, importantly, indicated that future hikes are unlikely to exceed that magnitude. Rates will continue rising, but at a more gradual pace than had been expected. Given the level of inflation, it is highly likely that real rates will remain negative. Analysis of gold’s performance during different US real interest rate scenarios (Table 2) shows that:

    • gold thrives when real interest rates are negative but isn’t hampered when they are between 0%-4%
    • gold is better at reducing portfolio risk during periods of moderate real rates, as it benefits from lower volatility and correlation to equities relative to periods of negative real rates.
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  3. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    3. Can you explain why gold and oil seem more correlated recently?

    Oil and gold have become more positively correlated over the past year or so (Chart 2). While this happens from time to time, the long-term correlation between the two is generally close to zero, sometimes oscillated between negatively and positively correlated over the last 25 years. For example, the correlation turned negative at near the start of the pandemic in 2020, when oil settled at a negative price and gold rallied 25%.

    The rationale for the recent positive correlation centres around heightened geopolitical uncertainty, which has not only boosted the performance of commodities – particularly energy – but also gold specifically, in its role as a hedge. As we’ve discussed previously, gold often lags other commodities in reflationary periods. It is almost a cause-and-effect situation where commodities move higher, creating inflation that some investors then hedge with gold.

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  4. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    4. Where is central bank buying headed?

    During a turbulent first quarter marked by geopolitical crises and surging inflation, central banks globally added 84t of gold to their reserves. While this is 29% lower y-o-y, it is more than double the previous quarter and, in the main, reflects buying by a few emerging market central banks. This healthy level of demand corresponds with the findings of our 2021 central bank survey: for the first time respondents highlighted gold’s performance during periods of crisis as the top reason to hold gold.

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  5. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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  6. Davros10

    Davros10 Well-Known Member Silver Stacker

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    Coincidence. It's going to happen occasionally
     
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