Rates continue to dominate
Following price weakness in the first two months of the year, the gold price extended its decline in March. Gold finished the month 3% lower at US$1,691.1/oz.1 It held above US$1,700/oz for most of the month, before falling back below that level in the final few days. By the end of March, gold was down over 10% y-t-d, its weakest quarterly performance since Q4 2016, and 18% below the record US$2,067/oz achieved in early August 2020.2 Gold’s performance has been similarly weak across major currencies (Table 1; page 8).
Despite the downward move in price, gold’s one-month implied volatility – reflecting market expectations of future fluctuations in the price – finished the month close to 14%, well below its historical realised average of 16% and the average levels seen in 2020. This sits in contrast to most risk-on assets, whose volatility tends to increase amid downward price movements, and highlights the role of gold as an effective risk management tool.
Chart 1: Rising interest rates weighed on gold throughout Q1
Rising interest rates weighed on gold throughout Q1
Contributions of gold price drivers to periodic gold returns*
*To 31 March 2021. Note: This is a multiple variable model featuring the four key thematic driver categories of monthly gold price returns: economic expansion, market risk, opportunity cost and momentum, themes that capture motives behind gold demand and most poignantly, investment demand; considered the marginal driver of gold price returns in the short-run. Residual includes other factors not currently captured by the model. Chart shown here is based on analysis covering a shorter estimation period of three years.
On Goldhub, see Short-term gold price drivers
Analysis based on our short-term gold return model indicates that the primary driver of gold’s decline during March, and throughout Q1, was higher interest rates, impacting the opportunity cost of holding gold (Chart 1).3 While expectations of higher inflation kept building, the continued bond sell-off pushed nominal and real yields on sovereign debt higher during the month – with the 10 year Treasury yield seeing the sharpest rise in thirty years.4 As such, the positive impact of rising breakeven rates was outweighed by rising nominal interest rates in March and y-t-d. Further analysis has also shown that gold’s sensitivity to interest rates as well as inflation has risen over the last year (Chart 2).
Chart 2: Gold’s sensitivity to interest rates has risen over the last year
Gold’s sensitivity to interest rates has risen over the last year
*Dec 2002 to Mar 2021. Note: DM FX: comprises euro and yen.
Investor sentiment towards gold remained broadly bearish, with net long positioning (Chart 11) falling to its lowest level since mid-2019, and net outflows from gold ETFs of 107.5 tonnes (t) over the month despite continued inflows from Asia (Chart 12). Central bank demand has remained mixed too, with net sales in January followed by net purchases in February.
India: Retail demand began to pick up in January, gathering momentum in February due to the reduction in import duty on gold, the lower gold price, and an appreciating rupee.
Following the 5.6% drop in the local gold price and better economic sentiment in February, both jewellery and investment demand witnessed a resurgence. Many consumers took advantage of lower gold prices to make wedding jewellery purchases, with the lower gold price also a welcome entry point for retail investors. Retail demand for both small gold bars (50g and 100g denomination) and coins gained strength during the month. The positive momentum continued into the first half of March as the price declined further. However, towards the end of the month demand slowed marginally as gold prices began to rise along with a sudden pick-up in COVID cases in several states.
Chart 3: Robust retail demand pushed local market premium to 51-month high in March
Robust retail demand pushed local market premium to 51-month high in March
Difference between the NCDEX gold price and the LBMA Gold price AM
Sources: ICE Benchmark Administration, NCDEX, World Gold Council; Disclaimer
China: In January and February, China’s tradition of hoarding gold products around the Chinese New Year (CNY) holiday boosted local gold consumption.5 Data from the Ministry of Commerce showed, in value terms, an 161% y-o-y surge in sales of all jewellery categories during the holiday.6 Most gold retailers we have spoken to noted that a dip in the local gold price, the CNY holiday, and the “stay put” initiative were the main factors supporting sales.7
Chinese gold ETFs also attracted local investors’ attention. At the end of March, Chinese gold ETF holdings have grown by over 5t y-t-d, reaching a new record high of 72.4t. The monthly average Shanghai-London gold price spread turned positive in January after remaining negative for 11 consecutive months and rose to around US$11/oz in March. The recovery in China’s gold consumption so far this year has led to the spread rising.
Other markets: While North American gold ETFs saw heavy outflows in March and Q1, some low-cost ETFs continued their positive trend.8 In addition, the US Mint reported strong levels of buying during Q1 (Chart 4, page 4). Reported sales of American Eagle coins totalled 55,500oz (1.7t; US$95mn) in March, taking the y-td sales total to 401,500oz (12.5t; US$720mn).9 This is the third strongest Q1 for gold sales on record, behind 1999 (694,000oz) and 1987 (420,500oz). Further evidence of significant interest in gold investment at a retail level came from the Perth Mint, which also reported significantly higher levels of buying. February sales of its minted gold products jumped 441% y-o-y, to a monthly record of 124,104oz. This increase was attributed to greater levels of retail demand from US consumers.10 In Germany, anecdotal evidence from local market participants suggests that consumer demand was similarly strong in Q1 despite the sizable outflows seen in the gold ETF space.
Chart 4: US gold Eagle coin sales were very strong during Q1
US gold Eagle coin sales were very strong during Q1
American Eagle gold coin sales*
Sources: US Mint, World Gold Council; Disclaimer
*To end March 2021. Note: Red bars indicate sales in Q1 in each year.
Looking ahead – rising inflation may offset interest rate headwinds
We believe investors are likely to remain focused on rising inflation expectations. But while gold’s increased sensitivity to interest rates may be significant headwinds to its performance in the short term, we believe that the recent sharp increase in interest rates may level off as central banks continue to use monetary policy tools to keep them in check. Some central banks, including the Reserve Bank of Australia and European Central Bank (ECB), have increased bond purchases when local yields increased, while both the Federal Reserve and the Bank of England have signalled a continuation of their current asset-purchasing plans and level of target rates. Despite the intense focus on rising yields during the quarter however, the overall level of yields remains structurally low. As a result, investors continue to shift their asset allocations from traditional high quality, low yielding bonds to assets which offer higher potential returns, but simultaneously higher volatility.
Chart 5: Gold prices have generally been supported by the overall increase in negative yielding debt
Gold prices have generally been supported by the overall increase in negative yielding debt
Global negative yielding debt vs gold prices*
*As of 31 March 2021. Note: Monthly numbers since September 2015. Negative yielding debt numbers based on Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Level. Gold: LBMA Gold Price PM (US$/oz)
In addition, investors may likely face elevated levels of risk, another key driver of gold investment demand, in the short to medium term as markets continue to assess how monetary and fiscal strategies play out. The divergent approaches to control higher yields taken by central banks around the world are likely to contribute to heightened risk as well. For example, the rising yield gap between the US and Europe could put further pressure on the ECB and the stuttering economic recovery in the latter.
We also expect rising inflationary pressures to be supportive for gold over the short to medium term. Recent stimulus measures have flooded capital markets with liquidity, pushing financial asset valuations ever higher. The so-called reflation trade will also lead to the uneven performance of equities, with value stocks outperforming growth stocks, causing higher volatility of some risk assets and the potential for possible pullbacks. Historically, gold has underperformed to commodities in the initial stage of a reflationary period but has generally tended to catch up and outperform in the longer term. As investors look to guard against these risks, gold investment may find further support in its role as a portfolio hedge.
Retail demand may also provide a boost. Key markets – such as India and China – have shown recent signs of a recovery in consumer demand (see Regional focus below). We will give a clearer picture of this in our forthcoming Gold Demand Trends Q1 2021 report which will be published at the end of April.
Key market trends and questions
Here are our thoughts on the key questions we have received from investors during the past month:
Will gold respond to inflation?
Gold is considered by many to be an effective hedge against inflation, although, to some, its performance y-t-d means it has not been living up to its reputation. Our recent analysis suggests gold’s current performance is consistent with the onset of previous reflationary periods. While we are likely to see higher prices as the economic recovery gathers strength, some believe inflation will be short-lived. But should inflationary pressures continue to mount, we may see gold respond as investors seek diversifiers that can provide wealth protection. As growth picks up, any resultant wage growth would also support greater levels of consumer demand in procyclical sectors such as jewellery.
You can read more on this in our upcoming report on inflation, to be published later this month.
Chart 6: Gold historically rallies in periods of high inflation, outperforming broad-based commodities
Gold historically rallies in periods of high inflation, outperforming broad-based commodities
Gold and commodity nominal returns in US dollars as a function of annual inflation*
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer
*As of 31 December 2020. Based on y-o-y changes in US dollars for ‘gold’: LBMA Gold Price PM, ‘commodities’: Bloomberg Commodity Index and ‘inflation’: US CPI since January 1971.
Is gold too volatile to be an effective hedge?
While gold’s sensitivity to interest rates has contributed significantly to its recent downward move, it nonetheless remains one of the least volatile mainstream assets. Over the past 20 years, gold’s volatility of 16% sits well below that of US equities and some alternative assets (Chart 7, page 7). During the quarter, its short-term implied volatility remained stable between 15% and 19%, while realised volatility was slightly below that long term average at 13%.
Gold’s volatility is also less important when it is part of a portfolio due to its low correlation to other assets, resulting in a lower contribution to overall portfolio volatility.
Chart 7: Gold has been less volatile than many equity indices, alternatives and commodities
Gold has been less volatile than many equity indices, alternatives and commodities
Average daily volatility of several major assets since 2000*
Sources: Bloomberg, COMEX, World Gold Council; Disclaimer
*Annualised volatility is computed based on daily returns in US dollars between 31 December 2000 and 31 December 2020. Computations in US Dollar Spot of total return indices for S&P 500 Index, MSCI Daily TR Gross EM USD, MSCI AC World Daily TR Gross USD, LBMA Gold Price PM USD, Bloomberg Commodity Index Total Return, LBMA Silver Price - Price/USD, Bloomberg WTI Crude Oil Subindex Total Return, Bloomberg Barclays Global-Aggregate Total Return Index Value Unhedged USD, S&P GSCI Copper Official Close Index TR, S&P GSCI Platinum Index TR ,FTSE Bursa Malaysia KLCI Index - Kuala Lumpur Composite Index, Korea Stock Exchange KOSPI Index, Straits Times Index STI.
On Goldhub.com see: Gold volatility
Is investment in gold being disrupted by cryptocurrencies?
The performance of cryptocurrencies, particularly Bitcoin, in recent months has been painted by some as a challenge to gold. While Bitcoin’s y-t-d return of 106% has captured the attention of many market participants, its annualised volatility of 95% remains at multiples of that of major equity indices, let alone gold. We maintain that gold and cryptocurrencies are fundamentally different propositions, and that gold can play a key strategic role in portfolios and not just act as a high-octane tactical investment. In fact, those investors with positions in cryptocurrencies may benefit from using gold as a means to hedge the additional risk.
Chart 8: Bitcoin’s annual volatility is still multiple times higher than equities and bonds
Bitcoin’s annual volatility is still multiple times higher than equities and bonds
Annualised average daily volatility*
Sources: Bloomberg, Datastream, World Gold Council; Disclaimer
*As of 31 March 2021. Annualised volatilities computed using the standard deviation of daily returns for the LBMA Gold Price PM, Bloomberg's XBT BGN, S&P 500 Index, and NASDAQ Composite Index, and multiplying it by √260.
Gold market monitor
*As of 31 March 2021. Based on the LBMA Gold Price PM in: US dollar (USD), euro (EUR), Japanese yen (JPY), pound sterling (GBP), Canadian dollar (CAD), Swiss franc (CHF), Indian rupee (INR), Chinese yuan (RMB), Turkish lira (TRY), Russian rouble (RUB), South African rand (ZAR), and Australian dollar (AUD).
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Chart 9: Year-to-date performance*
*To 31 March 2021. Note: Return computations for ‘EM equities’: MSCI Emerging Markets Total Return Gross; ‘Gold (US$/oz)”: LBMA Gold Price PM; ‘US treasuries’: Bloomberg Barclays US Treasury Total Return Unhedged USD; Commodities (GSCI)’: S&P GSCI Total Return; ‘Europe equities’: MSCI Daily Gross TR Europe; ‘US equities’: MSCI Daily Total Return Gross USA; ‘US credit’: Bloomberg Barclays US Credit Total Return Value Unhedged; ‘US TIPS’: Bloomberg Barclays US Treasury Inflation Notes Total Return Index Value Unhedged; ‘Euro treasuries’: Bloomberg Barclays EuroAgg Treasury Total Return Index Value Unhedged; ‘Oil(US$/bbl)’: US Crude Oil WTI Cushing OK Spot; ‘REITs’: Dow Jones US Select REIT Total Return.
Chart 10: Gold Price and moving averages*
Gold Price and moving averages*
Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer
*To 31 March 2021
Chart 11: COMEX net long positioning*
COMEX net long positioning*
*To 23 March 2021. Note: The Commitment of Traders (COT) report provides information on the positioning of speculative investors in the U.S. futures markets. Short positioning reflects bearish sentiment while long positioning reflects bullish sentiment in the gold futures’ markets.
On Goldhub, see COMEX net long positioning
Chart 12: Gold ETF flows by region*
Gold ETF flows by region*
Sources: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council; Disclaimer
*To end March 2021.
On Goldhub, see Global gold-backed ETF holdings and flows
1Based on the LBMA Gold Price PM as of 31 March 2021.
3For the purpose of this analysis, we estimated all coefficients using data over the past 3 years to better reflect current market dynamics.
5The Chinese New Year holiday fell between 11 February to 18 February in 2021.
8Low-cost US-based gold-backed ETFs are defined as exchange-traded open-ended funds listed in the US, backed by physical gold, with annual management fees of 20bps or less. At present, these include Aberdeen Physical Swiss Gold Shares, SPDR® Gold MiniShares, Graniteshares Gold Trust, and Goldman Sachs Physical Gold ETF.
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