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.