Gold Market Commentary

Sectors: Market insights

Gold rallied despite higher rates and equity strength

Key highlights    

  • Gold gained 1.5% in October in the face of higher bond yields, as a surge in inflation expectations, a weaker dollar, and improving futures positioning helped propel it higher, as highlighted by our return attribution model 
  • Gold ETFs have shown net disinvestment in 2021 but vaulted physical holdings and bar and coin markets suggest solid investment appetite from longer-term investors

Looking forward

  • Some central banks are beginning to raise rates or taper asset purchases and investors are beginning to focus on flattening rates curves and their potential implications if the trend continues 

Investor questions

Gold rose slightly in October, despite a risk-on environment and increases in short-term bond yields 

Gold rallied 1.5% in October to US$1,786/oz,1  testing the US$1,800/oz level multiple times late in the month. Gold’s positive return in October marked a reversal to its weaker performance in the previous two months. This performance is consistent with historical analysis that suggests that gold does well in early Autumn. Gold price strength happened amid higher nominal yields: gold had been generally inversely correlated with nominal bond yields this year. However, a rise in inflation expectations outweighed the move in nominal rates and resulted in lower real rates. Additionally, risk-on sentiment didn’t curtail the gold price strength, as many stock indices closed at all-time highs with the US and Europe up 5-8% across major markets, while Asian markets were relatively flat to slightly lower, particularly with weak Chinese economic data released throughout the month. Commodities were stronger, led by oil, up 12% on the month. Individual commodity supply constraints remain a focus for investors, which is a meaningful driver for recent performance (Chart 6).

Gold net long positioning on COMEX futures rose during the month to US$40bn (equivalent to 701t) from US$31bn (537t) the month before – the highest levels since late August. This could have been a factor in gold price support, particularly from the investment side, as the bulk of the increase came from managed money positioning (Chart 8).

From a technical analysis perspective, US$1,800/oz has been a “sticky” level, with regular price reversals to that level on both strength and weakness. The price has struggled to hold above the 200-day moving average, which currently sits just below that US$1,800/oz level. If the price were to hold above US$1,800/oz more consistently, the next resistance level would move up to US$1,875/oz –or 5% higher from current levels, as the downtrend would be broken (Chart 7).

Consistent with our qualitative analysis, our monthly return attribution model suggests that nominal rates continued to weigh on gold, but inflation breakevens, futures positioning, and commodity currencies were instrumental in pushing the price higher. 

The US 10-year breakeven inflation rate broke through 2.4% on October 5th, a level it had been flirting with for four months, and finished October 30bps higher m-o-m, the highest level in nine years. This could suggest that investors are more interested in the Fed’s reaction to inflation expectations than to the expectations themselves. 

By the end of the month, gold started to move higher alongside inflation expectations, supported by strong net inflows into COMEX futures and driven by US dollar weakness vs. both the Australian dollar (AUD) and Chinese renminbi – two prominent commodity currencies. Despite weakness in the US dollar versus the AUD and RMB, the broad dollar index was more resilient, and this cancelled out the impact of the currency on gold’s October performance.
 

 

Chart 1: Rising inflation expectations, a weaker dollar, and improving futures positioning drove gold prices higher in October

Rising inflation expectations, a weaker dollar, and improving futures positioning drove gold prices higher in October

Contributions of gold price drivers to periodic gold returns*

Rising inflation expectations, a weaker dollar, and improving futures positioning drove gold prices higher in October
Contributions of gold price drivers to periodic gold returns*
*To 31 October 2021. Our short-term model is a multiple regression model of weekly 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. ‘Residuals’ 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 31 October 2021. Our short-term model is a multiple regression model of weekly 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. ‘Residuals’ 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.

 

Looking ahead: shifting policy environment may challenge gold

Small developed central banks are beginning to raise interest rates post-COVID. It began with Norway in September,2  in addition to some other developed and emerging market countries like Brazil, Columbia, New Zealand, and Iceland, to name a few. A few others such as Australia and Canada have started to taper asset purchases.3  Australia is particularly interesting as we discussed potential yield-curve control related to them, earlier in the year. The ECB held off on making major changes to its policy last week.4  And most recently, this past Wednesday November 3rd, the Fed announced a largely expected plan to cut asset purchases, although Fed Chairman Powell did say they “could be patient” when it comes to rate hikes and that he still believes inflation will subside mid to late next year. Finally, on November 4th, the BOE unexpectedly held rates constant, on the back of growth concerns, resulting in the pound falling sharply. 

While gold has been inversely correlated with nominal interest rates over recent years, gold strengthened during the month despite higher nominal rates. This is likely a function of rising inflation expectations, as previously discussed, but could also be helped by changes in the relative move in interest rates. We’ve seen a meaningful shift in global treasury curves, which are experiencing “bear flattening”, particularly in the middle- to long-end of the curve. This occurs when shorter-term rates increase more than longer-term rates.5  While the curve remains relatively steep at current levels, a persistent bear flattening for a significant period could have broader implications. For example, inverted yield curves have been a leading indicator of the past eight recessions. 

Additionally, gold’s move higher could reflect the fact that investors are already pricing in future rate hikes, a phenomenon that was also seen in late 2015 as the Fed started to tighten monetary policy. Higher rates could be a headwind for gold, but the overarching concern of inflation and a potential recession (should history repeat itself), justifies gold as the appropriate diversifier and hedge within a portfolio.

 

Chart 2: Treasury yields are starting to flatten as the front end is rising more than the back end

Treasury yields are starting to flatten as the front end is rising more than the back end

US Treasury yield curves over the past number of months*

Treasury yields are starting to flatten as the front end is rising more than the back end
US Treasury yield curves over the past number of months*
*As of 31 October 2021 Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*As of 31 October 2021

 

Regional insights

China: In October, inflows into local gold ETFs continued for the fifth consecutive month, pushing their collective tonnage holdings to a record high. And as we enter Q4, the traditional peak gold consumption season in China, local wholesale physical gold demand remained strong: trading volumes of Au9999, the physical gold contract at the Shanghai Gold Exchange, averaged 17t in October, higher than the y-t-d average. 

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

India: Retail demand got off to a brisk start in the month with the onset of Navratri.6  Bullion offtake however fell during the third week of the month with the sudden increase in domestic gold price helped by rising gold price and weaker rupee. This pushed down the local gold price to an average discount of US$1.5/oz during the third week compared to an average premium of US$1.5/oz in the first two weeks of the month. Anecdotal evidence suggests strong retail demand (for both jewellery and bar and coin) ahead of Dhanteras - one of the historically strongest periods of gold demand – which pushed the local market to a premium of US$1-2/oz by the end of the month.7 

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

ETFs: Gold ETFs saw net outflows of 25.5t (-US$1.4bn) in October, reflecting diminished investor appetite in the gold ETF space following significant price declines in September (Table 1). Outflows in North America and Europe were marginally offset by inflows into Asia. At the end of the month, global holdings stood at 3,567t (US$203bn)8  – the lowest tonnage level year-to-date.9  Read our full October 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 103.1 1812.2 -14.7 -817.2 -0.8%
Europe 88.6 1557.4 -12.3 -702.5 -0.8%
Asia 8.1 136.5 1.3 73.9 1.0%
Other 3.5 61 0.2 10.8 32.0%
Total 203.2 3567 -25.5 -1,435.0 -0.7%

*To end October 2021.

On Goldhub, see: Gold-backed ETF flows.

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

 

 

Chart 3: Despite ETF outflows, investment demand remains strong via the physical vaulted markets

Despite ETF outflows, investment demand remains strong via the physical vaulted markets

Total vaulted physical investment gold in London*

Despite ETF outflows, investment demand remains strong via the physical vaulted markets
Total vaulted physical investment gold in London*
*As of 31 October 2021 Source: LBMA, BOE, Bloomberg, World Gold Council

Sources: Bloomberg, London Bullion Market Association, World Gold Council; Disclaimer

*As of 31 October 2021

 

Other investment demand: Despite weaker demand for gold ETFs, bar and coin investment has been healthy  particularly in the US and Germany. In London, growth in LBMA vaulted gold volumes (less ETFs and BoE holdings) is suggestive of strong demand in the vaulted space and remains as strong as it has for the past two years, despite global ETF outflows in 2021.10  This could relate to some investors shifting ETF positions into vaulted positions, or simply wanting additional physical exposure (Chart 3).

Coin purchases are strong in many markets, despite lower overall Q3 demand – heavily influenced by Turkey. American Eagle gold coin sales in the US totalled 149,500oz in October (+99% m-o-m and +108% y-o-y). Year-to-date sales now total 1,072,000oz, which is higher than any annual total since 2010, and is on track to be the highest in over two decades (Chart 4). Also, recent Perth Mint data showed sales totalling 59,750oz, -39% m-o-m and +56% y-o-y. Year-to-date, sales total 879,508oz, higher than any previous annual total, going back to 2012.

 

Chart 4: US Mint gold coin demand is on track for its strongest year in over two decades

US Mint gold coin demand is on track for its strongest year in over two decades

Annual demand for US Mint sales of American Eagle gold coins through October 2021*

US Mint gold coin demand is on track for its strongest year in over two decades
Annual demand for US Mint sales of American Eagle gold coins through October 2021*
*2021 depicts numbers through 31 October 2021 Source: US Mint, World Gold Council

Sources: US Mint, World Gold Council; Disclaimer

*2021 depicts numbers through 31 October 2021

 

Most-asked investor questions

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

What is the significance of the launch of the first US bitcoin ETF?

ETFs are well-established financial products that facilitate access to myriad of investments. While the launch of the bitcoin futures ETF is an interesting development, it is important to distinguish its structure from physically backed gold ETFs. Specifically, the bitcoin ETF is based on cash-settled bitcoin futures and does not hold the underlying asset while physically backed gold ETFs hold actual physical gold.

We often discuss futures-based commodity funds and futures in the context of total returns. As we’ve previously noted in Gold: the most effective commodity investment – 2021 Edition, the spot returns of commodities often significantly overstate total returns for an investor, particularly with commodities that have high storage costs or difficulty in settling for physical delivery (Chart 5).

Bitcoin futures generally trade in contango, and thus require a roll cost to maintain. Coupled with the management fee and the average futures roll over the past two years, this amounts to about 10% a year, which may not be a consideration for an investor who believes bitcoin can return 100% per year as it has done so far in 2021 but will certainly eat into total returns over the long run.11 

Currently, there are no physical-based bitcoin ETFs, but there are Trusts that hold a fixed amount of bitcoin. However, they frequently trade at significant premiums or discounts to net asset value. For example, the largest US-based Trust price has ranged from a 21% discount to 40% premium over the past year.12  Putting this in context, bitcoin spot is up 103% in 2021, while the fund is only up 20%, through October.13 

Fund structure is one difference. More holistically, investors should also consider the differing roles that gold and cryptocurrencies play in their portfolios especially vis-à-vis volatility hedging and drawdown risks.

 

Chart 5: Total return concerns for cryptocurrency ETFs could mirror those of some commodities that sharply underperform spot returns

Total return concerns for cryptocurrency ETFs could mirror those of some commodities that sharply underperform spot returns

Total returns and spot returns for some individual commodities and commodity sectors*

Total return concerns for cryptocurrency ETFs could mirror those of some commodities that sharply underperform spot returns
Total returns and spot returns for some individual commodities and commodity sectors*
*Returns from 1 June 2001 – 1 June 2021. Note: ‘US Treasuries’: Bloomberg Barclays US Treasury Index; ‘IG Credit’: Bloomberg Barclays US Credit Index; ‘US Equities’: S&P 500 Index; ‘Gold’: GOLDS Cmdty. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Returns from 1 June 2001 – 1 June 2021. Note: ‘US Treasuries’: Bloomberg Barclays US Treasury Index; ‘IG Credit’: Bloomberg Barclays US Credit Index; ‘US Equities’: S&P 500 Index; ‘Gold’: GOLDS Cmdty.

 

How does the recent runup in commodities’ prices fit with the increased interest in ESG investment and what are the implications for gold?

We often note that gold is not heavily correlated with the overall commodities index, and there is little to no long-term direction in gold and oil correlation over many decades. We have also highlighted that gold is a low carbon investment as over 99% of its carbon footprint is associated with the mining process, with very little emissions associated with gold’s use as a product or asset. The S&P 500 ESG index is up 25% through October, while the MSCI World ESG Leaders Index is higher by 21% through the end of October. So there continues to be strength in the space even though the S&P GSCI (heavily weighted toward energy), has returned 46% and the Bloomberg Commodity Index has returned 33% this year.

Much of the commodity strength is related to supply constraints across many subsectors, along with the surge in oil prices, that saw a negative price settlement during COVID in 2020. Historically, surges in energy prices have been positive for demand in areas of the market like electric vehicles, that become more attractive to use with higher oil prices, which is also the case this year. While higher commodity prices tend to lead to less demand over time, this situation is unlike most others in that it is truly supply driven, thus, we could see a situation where both commodities, commodity-linked stock and ESG investments all rise together.

Gold has a place as an ESG investment, and the fact that it also exhibits qualities of a commodity – despite having crucial differences – should give credence to additional comfort in adding gold to an investment portfolio.

US CPI and wages grew the most in multiple decades in September; what does this mean for gold?

US CPI and wages rose the most in 30 and 20 years, respectively during September, while consumer sentiment has been waning and inflation expectations continued to rise in October, both in the US and Europe.14  There are several drivers of this situation. The global supply chain remains constrained, and the percentage of the workforce either in work or looking for work is at 60-year lows, partially the result of recent accommodative COVID-19 government policies.

Gold has historically responded strongly to periods of high US CPI, such as the ones markets experienced in the 1970s and 1980s. However, we have also found that gold prices have been more intricately linked to the money supply and less to US CPI since the 1990s. Part of this is due to inflation targeting by central banks, but also a function of the global nature of gold as an inflation hedge. Should US CPI remain elevated for longer, we could see gold react positively as it did historically. However, should inflation remain subdued, gold is more likely to follow money supply growth, and not react as much to CPI increase.

Finally, the increase in wages is an example of how the wealth effect relates to gold demand. As wealth increases, people have more disposable income which has historically coincided with an increase in gold jewellery and technology demand.
 

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)
August -0.6% -0.1% -0.5% 0.4% 0.6% 0.5% -2.5% -0.5% -1.9% -0.5% -1.7% 0.0%
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%
YTD -6.3% -0.9% 3.5% -6.5% -8.8% -3.1% -3.9% -8.3% 21.2% -10.1% -3.0% -3.7%

*As of 31 October 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 31 October 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;

*To 31 October 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;

 

 

Chart 7: Gold price and moving averages*

Gold price and moving averages*

Gold price and moving averages*
‘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. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

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

‘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 8: COMEX net long positioning*

COMEX net long positioning*

COMEX net long positioning*
*To 26 October 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 26 October 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 31 October 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 31 October 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 29 October 2021.

2www.cnbc.com/2021/09/23/norway-becomes-the-first-central-bank-to-hike-rates-post-covid.html

3www.reuters.com/world/asia-pacific/australias-cbank-holds-rate-near-zero-economy-bolts-ahead-2021-06-01/

4www.cnbc.com/2021/10/28/christine-lagarde-speaks-after-the-ecbs-latest-rate-decision.html

5www.investopedia.com/terms/b/bearflattener.asp

6https://en.wikipedia.org/wiki/Navaratri

7https://www.diwalifestival.org/dhanteras.html

8We regularly review the global gold-backed ETF universe and adjust the list of funds and holdings based on newly available data and information.

9Based on the LBMA Gold Price PM as of 30 September 2021.

10Source: LBMA, BOE; https://www.bankofengland.co.uk/statistics/gold, https://www.lbma.org.uk/prices-and-data/london-vault-holdings-data

11Source: Bloomberg. Based on the ProShares Bitcoin Strategy ETF 0.95% annual management fee and the average difference between the front month and second month futures in bitcoin over the past two years through 31 October 2021.

12https://ycharts.com/companies/GBTC/discount_or_premium_to_nav

13Based on Bloomberg data from Grayscale Bitcoin Trust, from 1 January 2021 through 31 October 2021.

14www.wsj.com/articles/consumer-spending-personal-income-inflation-september-2021-11635449959

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