- Our short-term gold performance model enables investors to dissect monthly gold returns into key drivers of investment demand
- Different estimation windows provide additional insights on the varying influence of drivers over time
- During May, our model shows gold’s performance was only modestly impacted by rates but they still remain a relevant driver this year
Previously we highlighted a key insight from our short-term gold model that there was increased sensitivity to certain variables, such as interest rates, which was driving prices lower at the time. With rates remaining steady last month alongside gold’s robust rally of more than 7%,1 investors may now be asking what other factors were influencing prices.
To answer this, we look again to our short-term gold performance model2 to help analyse monthly or intra-month gold returns using drivers of investment demand over the short term, which complements our longer-term Gold Valuation Framework (GVF).3
But what is our short-term model and how can investors use it?
Our model uses monthly inputs for multiple variables that can be grouped within four key drivers of gold performance,4 employing statistics from 2007 onwards. Using multiple regression, we calculate sensitivities for each variable and the contribution they make to each month’s gold return. We normalise each variable by its respective Z-score every month, or the difference from its overall mean divided by standard deviation, which allows us to gauge the impact of variables on gold in a standardised measure.
The model uses the full 14-year period as its starting point,5 but we can also use the model to estimate the coefficients over shorter windows (for example, two or three years) to assess how these change over time. We can further enhance this shorter window analysis by using weekly inputs to attribute intra-month performance and examine sensitivity over the past year.6
The combination of these different methodologies can help assess which quantitative variables better explain gold’s performance. Additionally, the result can be complemented by a qualitative assessment and anecdotal evidence to create a comprehensive picture of gold’s behaviour over time.
Using May 2021 as a practical example…
Gold increased 7.5% m-o-m in May, closing near to US$1,900/oz.7 Our model indicates that almost 4% came from momentum, driven by positive flows into gold ETFs as well as an increase in futures net long positions. This was more than double the contribution made by the oft-discussed opportunity cost driver, which captures both currencies and interest rates.
While momentum in gold positioning and funds may have outperformed other drivers last month, on average this does not hold up over the full 14-year estimation period. Table 1 shows that movements in interest rates and inflation expectations, as expressed by the US 10-year breakeven inflation rate, have had the largest absolute impact on gold returns since 2007, while the variable tied to developed market (DM) currencies, for example, has proven less consequential over the long-term horizon.
Table 1: Interest rate and inflation measures have led individual gold drivers since 2007
Coefficients of explanatory gold variables ranked by magnitude*