Gold Market Commentary

Sectors: Market insights

Offsetting inflation and a stronger dollar kept gold little changed in November

Key highlights

  • Gold ended November slightly higher, rising 2% m-o-m to US$1,804.4/oz based on the LBMA Gold Price PM
  • Steady interest rates and higher inflation expectations were offset by a stronger dollar
  • Global gold ETFs had their first month of inflows since July, and developed market central banks added gold to their reserves for the first time since 2013

Looking forward

  • All eyes are likely to remain on interest rate decisions and COVID in December

Investor questions

Gold marginally higher amid competing forces

Gold rose 2% in November based on the LBMA reference price, rallying early in the month before giving up most of those gains in the following weeks.1 Gold’s performance came against a backdrop of weaker equities and commodities, lower yields, and US dollar strength. The path of the gold price in November was marked by several key moves:

  • Gold rebounded from an intra-month low of US$1,763/oz on Nov 3 as the US Fed announced its plan to taper its bond-buying programme while not rushing rate rises. Gold’s move was accelerated when the BoE surprised markets by keeping rates on hold
  • A few days later, the October US CPI print of 6.2% y-o-y –  its highest level since 1990 – fuelled ongoing concerns that inflation will likely to be more persistent than initially expected. This pushed the gold price ~US$30/oz higher close to US$1,860/oz. 
  • Gold’s breakout from its 15-month downtrend proved short-lived as upbeat US retail sales, led to further strengthening in the US dollar, creating headwinds for gold. This was compounded by rising yields that followed Fed Chair Powell’s nomination for a second term.

Towards the end of the month, gold found support at the US$1,780/oz level, near its 50- and 200-day moving averages. While concerns over the new Omicron COVID variant provided some additional safe-haven support for gold in the final few days of November, it wasn’t enough to push gold above US$1,800/oz.

Changes in net long positioning on COMEX echoed price performance (Chart 8). During the first half of the month, net long positions rose to 882t (US$52bn), the highest tonnage level since early August 2020 – around the time the US$ gold price hit a record US$2,067/oz.2 However, Managed Money traders reacted to Powell’s renomination by cutting their positions to 731t (US$42bn) by the end of the month – in line with the price decline.

Consistent with qualitative evidence, our return attribution model shows that the rising US 10-year breakeven inflation rate was the dominant positive factor for gold, by pushing real yields lower for much of the month. Breakeven inflation rose to 2.7% intra-month – it’s highest level since 2005 – before falling back towards 2.5%. Gold remains heavily influenced by investors’ continued focus on the path of inflation (in the US, but also globally) and the Fed’s and other central banks’ potential reaction to it. In contrast, dollar strength was a headwind in November, acting as a drag on gold’s performance, but not enough to outweigh inflation concerns.
 

 

Chart 1: Inflation expectations and US dollar influenced gold performance in November

Inflation expectations and US dollar influenced gold performance in November

Contributions of gold price drivers to periodic gold returns (XAU)*

Inflation expectations and US dollar influenced gold performance in November
Contributions of gold price drivers to periodic gold returns (XAU)*
* To 30 November 2021. Our short-term model is a multiple regression model of monthly gold price returns, which we group into the four key thematic driver categories of gold’s performance: economic expansion, market risk, opportunity cost, and momentum. These themes capture motives behind gold demand; most poignantly, investment demand, which is considered the marginal driver of gold price returns in the short run. ‘Unexplained’ represent the percentage change in the gold price that is not explained by factors currently included in the model. Results shown here are based on analysis covering an estimation period from February 2007 to October 2021. On Goldhub, see: Short-term gold price drivers. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

* To 30 November 2021. Our short-term model is a multiple regression model of monthly gold price returns, which we group into the four key thematic driver categories of gold’s performance: economic expansion, market risk, opportunity cost, and momentum. These themes capture motives behind gold demand; most poignantly, investment demand, which is considered the marginal driver of gold price returns in the short run. ‘Unexplained’ represent the percentage change in the gold price that is not explained by factors currently included in the model. Results shown here are based on analysis covering an estimation period from February 2007 to November 2021. On Goldhub, see: Short-term gold price drivers.

 

Looking ahead: timing of rate rises remains key

Investors are likely to remain preoccupied by inflation and the potential monetary policy response for the remainder of the year. Just last week, Chairman Powell stated the word ‘transitory’ should no longer be used and hinted that the Fed may start tapering sooner than previously thought. In this context, market participants will likely continue try to anticipate the Fed intentions as new economic indicators are released. The ECB and BoE both have policy meetings in December, but with different market expectations as to the respective outcomes: the ECB seems committed to its accommodative stance, while the latter may tighten sooner (Chart 2). These decisions will likely remain a key driver of gold.

COVID is also an ever-present source of uncertainty. Many parts of Europe have seen higher cases leading to restrictions being re-imposed. And the new Omicron variant compounds the pressure. While there are more questions than answers, it is notable that many of the 2022 outlook reports released in recent weeks did not flag new COVID-19 variants as a risk over the year ahead. Omicron also highlights that the risks from the pandemic have not yet vanished. And may give institutional investors reason to pause and consider their downside protection.

Beyond the new year, we believe that many of the factors which have driven gold this year will remain important in 2022: the pace and direction of inflation and rates, COVID, and the resilience of global economic growth. Uncertainty will likely continue to provide a level of support for gold investment as a hedge. Equally, the strength of the recovery in consumer demand, will depend on the strength of the economic recovery in key markets as well as the direction and volatility of the gold price. Finally, we expect continued support from central banks as gold remains a key component of central bank reserves. We will be writing more extensively on this topic in our Gold Outlook 2022 report, to be published in early January.
 

 

Chart 2: Speed of interest rate hikes will be closely watched by investors

Speed of interest rate hikes will be closely watched by investors

Implied base rate derived from overnight index swaps*

Speed of interest rate hikes will be closely watched by investors
Implied base rate derived from overnight index swaps*
*Data as of 2 December 2021. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Data as of 2 December 2021.

 

Regional insights

China: Wholesale demand remained elevated in November as the seasonally strong Q4 for gold consumption unfolds. The average daily trading volume of Au9999 contract – designed to meet physical demand – stayed above its y-t-d level.3 China’s gold imports in October rose to the highest since 2019 according to the latest China Customs’ data, driven by a lower inventory and robust demand. In contrast, local gold ETFs witnessed their first monthly outflows since May possibly due to profit-taking activities and a stable equity market.

You can read more about the Chinese gold demand in November on the Goldhub blog.

India: Retail demand got off to a strong start in November. Anecdotal evidence points towards robust sales during Dhanteras, with retailers reporting sales volumes exceeding the pre-pandemic levels of 2019.4  However, there were indications that demand began to weaken after mid-month due to higher gold prices, ample bullion stocks, and a slowdown in gold purchases post-Dhanteras. This caused the domestic gold price to flip back to a discount of US$2-3/oz (compared with a premium of US$1-2/oz in the first two weeks). Demand rebounded at the end of the month, supported by lower gold prices and wedding purchases, narrowing the local discount to US$0.5-1/oz.

You can read more about the Indian gold demand in November on the Goldhub blog.

ETPs: Gold ETPs registered 13.6t (US$838mn) of net inflows in November.5   This is the first monthly inflow since July. Combined inflows into North American- and European-listed products comfortably outweighed outflows from Asia, which saw holdings fall for the first time since May (Table 1). Global holdings rose to 3,578t (US$208bn) against a backdrop of decades-high inflation and heightened market volatility.6  

Read our full November gold ETF flow commentary on Goldhub.
 

Table 1: Regional changes in gold-backed ETF holdings*

  AUM (US$bn) Holdings (tonnes) Change (tonnes) Flows (US$mn) Flows (% AUM)
North America 105.8 1,823.70 12.1 743.6 0.72%
Europe 90.5 1,560.30 5.6 333.1 0.38%
Asia 7.9 132 -5 -296.8 -3.65%
Other 3.6 61.8 1 57.6 1.66%
Total 207.8 3,577.90 13.6 837.60 0.41%

*Data to 30 November 2021. On Goldhub, see: Gold-backed ETF flows.

Source: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council

 

Central banks: Latest data from the IMF shows that two developed market central banks have purchased gold this year: Singapore and Ireland. The Monetary Authority of Singapore has made year-to-date purchases of 26t, accumulated over May and June, its first gold purchase since at least 2000. Ireland added 2t to its gold reserves over September and October, its first increase since 2008.

This is notable given that official sector demand since 2010 has been dominated by emerging market banks (who typically hold less gold as a percentage of total reserves) (Chart 3). We will continue to monitor central bank activity for any emerging trends. You can access our monthly central bank gold statistics on Goldhub.

 

Chart 3: Developed market central bank demand witnessed in 2021

Developed market central bank demand witnessed in 2021

Annual central bank gold demand by economic development status*

Developed market central bank demand witnessed in 2021
Annual central bank gold demand by economic development status*
*Data as of 31 October 2021. Note: China’s purchase of 454 tonnes of gold, announced in April 2009 took place over a six-year period from 2003 – 2009, while its purchase of 604 tonnes of gold, announced in June 2015 took place over a six-year period from 2009 - 2015. Japan’s reported an 81t increase in its gold reserves in March 2021 has been excluded as this was the culmination of an off-market transaction between two different divisions within the Ministry of Finance. Source: IMF IFS, Respective central banks, World Gold Council

Sources: IMF IFS, Respective central banks, World Gold Council; Disclaimer

*Data as of 31 October 2021. Note: China’s purchase of 454 tonnes of gold, announced in April 2009 took place over a six-year period from 2003 – 2009, while its purchase of 604 tonnes of gold, announced in June 2015 took place over a six-year period from 2009 - 2015. Japan’s reported an 81t increase in its gold reserves in March 2021 has been excluded as this was the culmination of an off-market transaction between two different divisions within the Ministry of Finance.

 

Most-asked investor questions

Here are our thoughts on the key questions we have received from investors during the past month:

Have cryptocurrencies negatively impacted gold’s performance in 2021?

We have seen many market commentators suggesting that investment flows may have switched from gold to cryptocurrencies this year, but concrete evidence for this is slim. But we can make an educated guess based on the information and tools we have available. 

For example, we modified our return attribution model by adding a cryptocurrency index as an explanatory variable.7 Our analysis suggests that cryptocurrencies have, at best, had a marginal effect on gold without much statistical significance. We will provide further details of this analysis in an upcoming blog.

In response to the suggestion that cryptocurrencies were being bought instead of gold as a ‘better’ inflation hedge, we also tested to see if that impact increased in line with rising inflation expectations. The results showed that, in fact, the opposite was true: in the face of higher inflation expectations gold also benefited from investor flows. 

And we note that the ability of cryptocurrencies to hedge inflation is unclear. The evidence that the upward trend in both the value of cryptocurrencies in 2021 and CPI inflation is likely spurious, since the ascent in crypto has been likely supported by its positive momentum. Furthermore, there have been two notable dislocations during 2021 when cryptocurrencies not only failed to react to record-high CPI prints but materially sold off (Chart 4).

 

Chart 4: Cryptocurrency performance has diverged from CPI 

Cryptocurrency performance has diverged from CPI

US CPI and the Bloomberg Galaxy Cryptocurrency Index (BGCI)*

Cryptocurrency performance has diverged from CPI
US CPI and the Bloomberg Galaxy Cryptocurrency Index (BGCI)*
*Data to 2 December 2021. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Data to 2 December 2021.

 

Could higher gold prices hurt the recovery in the consumer elements of demand?

A rising gold price could impact the affordability of gold jewellery for many, but that is not the only factor. Our analysis shows that price expectations can also play a role. When consumers think the price is likely to rise further, it can encourage them to bring forward purchases – particularly in markets such as India and China, where there are traditional gifting occasions for gold.

In addition, the income/wealth effect is also an important factor. For example, improving economic growth generally boosts jewellery demand for gold, as people become wealthier and have greater levels of disposable income (Chart 5).

 

Chart 5: Higher wealth tends to positively impact gold jewellery demand

Higher wealth tends to positively impact gold jewellery demand

Percentage change in annual gold jewellery demand and GDP*

Higher wealth tends to positively impact gold jewellery demand
Percentage change in annual gold jewellery demand and GDP*
*Data to end 2020. Source: IMF World Economic Outlook, Metals Focus, Refinitiv GFMS, World Gold Council

Sources: IMF World Economic Outlook, Metals Focus, Refinitiv GFMS, World Gold Council; Disclaimer

*Data to end 2020.

 

How does gold fit with the introduction of central bank digital currencies (CBDCs)?

With private cryptocurrencies gaining mainstream acceptance, this has prompted central banks across the globe to investigate the possibility of official digital currencies. CBDCs could potentially allow policymakers to optimise economic impact or address social concerns, although issues such as personal privacy also need to be addressed.

Gold, on the other hand, has continued to thrive as a physical form of money that is no-one’s liability. With CBDCs the works around the world, discussions about privacy, monetary policy, and programmability will emerge. Gold may offer some a way to allay these concerns. Currency volatility may also result from increasing cross-border usage of CBDCs, which could prompt some central banks to potentially build up greater gold reserves. 

Gold market monitor

Figure 1: Gold return in key currencies during 2021*

  USD EUR JPY GBP CAD CHF INR RMB TRY RUB ZAR AUD
  (oz) (oz) (g) (oz) (oz) (oz) (10g) (g) (oz) (g) (g) (oz)
September -4.0% -2.2% -2.5% -2.0% -3.7% -2.2% -2.4% -4.0% 2.6% -4.6% -0.1% -2.8%
October 1.5% 1.7% 3.7% -0.1% -0.7% -0.6% 2.4% 0.5% 9.9% -1.0% 2.6% -2.4%
November 2.0% 4.9% 1.6% 5.7% 5.6% 3.3% 2.4% 1.5% 40.8% 6.9% 7.5% 8.0%
YTD -4.4% 3.9% 5.1% -1.2% -3.7% 0.1% -1.7% -6.9% 70.8% -3.9% 4.3% 4.0%

*As of 30 November 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 6: Year-to-date performance*

Year-to-date performance*

Year-to-date performance*
*To 30 November 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.

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*To 30 November 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 7: Gold price and moving averages*

Gold price and moving averages*

Gold price and moving averages*

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

 

Chart 8: COMEX net long positioning*

COMEX net long positioning*

COMEX net long positioning*
*To 30 November 2021. Note: The Commitment of Traders (COT) report provides information on the positioning of speculative investors in the US futures markets. Short positioning reflects bearish sentiment while long positioning reflects bullish sentiment in the gold futures markets. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*To 30 November 2021. Note: The Commitment of Traders (COT) report provides information on the positioning of speculative investors in the US futures markets. Short positioning reflects bearish sentiment while long positioning reflects bullish sentiment in the gold futures markets.

 

Chart 9: Gold ETF flows by region*

Gold ETF flows by region*

Gold ETF flows by region*
*To 30 November 2021. Note: ‘Gold (US$/oz)’: LBMA Gold price PM (end-of-period). On Goldhub, see: Global gold-backed ETF holdings and flows. Source: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council; Disclaimer

*To 30 November 2021. Note: ‘Gold (US$/oz)’: LBMA Gold price PM (end-of-period). On Goldhub, see: Global gold-backed ETF holdings and flows.

 

Footnotes

1Based on the LBMA Gold Price PM as of 30 November 2021. It should be noted that shortly after this price was registered, the spot price fell sharply on the back of comments by Fed Chairman Powell. Using spot prices, gold’s performance in November was virtually flat.

2Based on the LBMA Gold Price PM as of 6 August 2021.

3For more details on Chinese gold futures, please see: https://www.gold.org/goldhub/gold-focus/2019/06/tale-two-contracts-speculative-investment-physical-demand-down

4Dhanteras is the first day of Diwali, one of the most important festivals in the Hindu calendar and a traditional gold purchase occasion.

5We regularly review the global gold-backed ETF universe and adjust the list of funds and holdings based on newly available data and information.

6All value figures based on the LBMA Gold Price PM as of 30 November 2021.

7Bloomberg Galaxy Crypto Index

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