Gold Market Commentary

Sectors: Investment

Shifts to monetary policy challenge gold

Key highlights:

  • Gold faced headwinds throughout September, falling by almost 4%
  • Higher US yields were a major driver of gold’s weakness, with smaller contributions from futures positioning and US dollar strength 
  • Early indications suggest a positive demand environment in China and India during September 

Looking Forward:

  • Hawkish shift by some central banks creates challenging environment for gold 

Investor questions:

Gold fell in September amid general weakness in financial assets

Gold fell in September by 4% to around US$1,743/oz.1 This was the second consecutive month of declines, with gold now over 8% lower y-t-d. Gold wasn’t alone however. Treasuries, corporates, US- and non-US equities all fell in September possibly as a result of deleveraging. The Q2 level of margin debt for equities was at a record high. It would be understandable if some leverage has been removed as we head into the historically volatile month of October. And, in our view, it’s quite possible that this deleveraging has affected most assets (energy and industrial metals excepted).

 

 

Chart 1: Gold failed to generate momentum in September

Chart 1: Gold failed to generate momentum in September

Hourly spot gold price*

Chart 1: Gold failed to generate momentum in September
Hourly spot gold price*
*Data to 30 September 2021. Source: Bloomberg, World Gold Council

Data as of

Sources: Bloomberg, World Gold Council; Disclaimer

*Data to 30 September 2021.

*Data to 30 September 2021.
Source: Bloomberg, World Gold Council

 

Gold’s performance in September was marked by three sharp price reactions (Chart 1):

  • Gold’s initial positive reaction to US employment data early in the month was quickly snuffed out. It fell sharply below support at US$1,810/oz.
  • Cooler US CPI data for August saw gold initially jump US$20/oz on hopes that tightening of monetary policy would be delayed. But it once again broke through its next support at US$1,782/oz.
  • As news of the Evergrande situation unfolded around 20 September, gold made gains. But it again failed to maintain that momentum, instead retreating towards US$1,745/oz.

A general apathy towards gold was also reflected in the futures market. Sentiment towards gold – via net long positioning on COMEX – dropped as the month progressed. Global gold ETFs registered another month of outflows in September, although less than in the previous month (Table 1).

Our short-term model suggests that movement in the US 10-year yield – captured by ‘opportunity cost’ –  was a major driver in gold’s weakness (Chart 2). However, , gold’s reaction was relatively muted when yields rose almost 25 basis points in the last week of the month. Futures positioning was also weaker during September along with negative ETF flows, both included in the ‘momentum’ category, but the net contribution to gold’s negative performance was moderate. Equally, dollar strength, as given by a rise in the broad US dollar index, increased the opportunity cost of gold, but its effect was comparatively smaller.

 

Chart 2: Quarter-to-date high interest rates, ETF outflows, and a stronger dollar drove gold prices lower in September

Chart 2: Quarter-to-date high interest rates, ETF outflows, and a stronger dollar drove gold prices lower in September

Contributions of gold price drivers to periodic gold returns*

Chart 2: Quarter-to-date high interest rates, ETF outflows, and a stronger dollar drove gold prices lower in September
Contributions of gold price drivers to periodic gold returns*
*To 30 September 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 September 2021. On Goldhub, see: Short-term gold price drivers Source: Bloomberg, World Gold Council

Data as of

Sources: Bloomberg, World Gold Council; Disclaimer

*To 30 September 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 September 2021. On Goldhub, see: Short-term gold price drivers

*To 30 September 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 September 2021. On Goldhub, see: Short-term gold price drivers
Source: Bloomberg, World Gold Council
 

Looking ahead: shifting policy environment may challenge gold

Following months of speculation, the US Fed finally signalled that it was almost ready to begin tapering asset purchases – perhaps as soon as November. This hawkish turn comes as concerns grow that inflation may be far less transitory than initially expected. The imminent reduction in asset purchases, and likely subsequent interest rate hikes, will almost certainly be a headwind for gold. But other factors are worth considering.

Other regions continue to receive central bank support. The European Central Bank and Bank of Japan, for example, both maintain an accommodative approach, which should benefit gold in those regions. What’s more, as inflation runs hot – in the US and Europe especially – gold’s historical performance as a hedge against a reduction in purchasing power could come into focus.

Gold’s performance will likely remain choppy as the markets continue to assess the potential impact of economic indicators on central bank policy. The need for portfolio protection and diversification is ever present, but the more optimistic economic outlook could weigh on gold investment and sentiment.

Regional insights

China: Early data for September paints a moderately positive picture for gold demand. With the peak season for gold consumption approaching,2  physical demand has shown signs of improving: average daily trading volumes were 32% higher than in August. This helped keep the Shanghai-London gold price premium healthy at US$7.5/oz, 29% higher m-o-m. And as stock market volatility increased, local gold ETFs saw inflows.

The latest data from China Customs shows 77t of gold was imported in August, 16% higher m-o-m. Imports were boosted by higher demand ahead of the seasonally-strong Q4 period and a rising local premium.

You can read more about the Chinese gold demand in September later this month on the Goldhub blog.

India: Gold demand remained firm in September, having strengthened in August. It was supported by wedding-related purchases and the release of pent-up demand following lower local gold prices. The local price remained at a small premium of US$1–2/oz over the first half of the month. But retail demand slightly softened with the onset of Pitru Paksha3  from 20 September – considered an inauspicious period for gold purchases – and resulted in the local premium finishing the month flat.

You can read more about the Indian gold demand in September later this month on the Goldhub blog.

Central banks: Initial data shows central banks bought a net 28.4t in August. Interest was limited to a small group of familiar names, with recent buyers India (12.9t), Uzbekistan (8.7t), Kazakhstan (5.3t), and Turkey (2.8t) all adding to their gold reserves during the month.

You can read more about the central bank demand in August on the Goldhub blog.

ETF Commentary: Gold ETFs saw net outflows of 15.2t (-US$830mn) in September, reflecting the headwinds gold faced during the month (Table 1). Outflows in Europe and North America were only partially offset by inflows into Asia. At the end of the month, global holdings stood at 3,592t (US$202bn)4  – the lowest tonnage level since April.5   Read our full September 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 102.4 1,827.4 -6.6 -348.6 -0.3%
Europe 87.9 1,568.7 -11.5 -640.0 -0.7%
Asia 7.8 135.2 2.4 134.6 1.7%
Other 3.4 60.6 0.4 24.5 0.7%
Total 201.5 3,591.9 -15.2 -829.5 -0.4%

*To end September 2021.
On Goldhub, see: Gold-backed ETF flows.
Source: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council

Most-asked investor questions

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

Concerns over stagflation seem to be rising, so how might gold perform in such an environment?

According to some recent indicators, the H1 economic recovery could be slowing. Meanwhile, inflation remains elevated. Some argue this phase will be short-lived, but nonetheless it could be damaging to investors if future cash flows of financial assets are impacted by the double-whammy of low growth and higher inflation.

Historical analysis finds that defensive assets are the best performers in a stagflationary environment, where the opportunity cost for non-yielding assets is lowered. Gold has seen good returns in these periods, boosted by an elevated risk environment, equity market weakness, low real interest rates and a weaker US dollar.

You can read more on this in our upcoming report on stagflation, to be published later this month.

Chart 3: Gold performed better during periods of stagflation*

 

Chart 3: Gold performed better during periods of stagflation*

Chart 3: Gold performed better during periods of stagflation*
*Returns from 31 December 1972 to 23 June 2020. Note: US Treasuries: Bloomberg Barclays US Treasury Index; IG Credit: Bloomberg Barclays US Credit Index; US Equities: S&P500 Index; Gold: GOLDS Cmdty Source: Bloomberg, World Gold Council

Data as of

Sources: Bloomberg, World Gold Council; Disclaimer

*Returns from 31 December 1972 to 23 June 2020. Note: US Treasuries: Bloomberg Barclays US Treasury Index; IG Credit: Bloomberg Barclays US Credit Index; US Equities: S&P500 Index; Gold: GOLDS Cmdty

*Returns from 31 December 1972 to 23 June 2020. 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

 

With the possibility of real rates rising sooner than some expected, how could this affect gold?

It’s intuitive that gold should perform well in negative interest rate environments, given the opportunity cost of holding a non-yielding asset. This means that higher real rates should lead to lower gold prices. But our analysis shows that US real rates would need to rise above 2.5% for there to be a significant long-term negative impact on gold (Table 2). A return to a real rate environment of 0–2.5%, meanwhile, tends only to result in slightly lower real returns on gold compared to its 6.2% long-term average.6  

Table 2: Gold has outperformed its long-term average in moderate real- and nominal-rate environments

Interest rate environment Annualised nominal gold return Annualised real gold return
Absolute real rate level    
All 8.0% 3.9%
Negative 18.7% 10.8%
Moderate 9.5% 6.2%
High 2.7% -0.6%
Rate direction  
Falling 7.1% 4.5%
On Hold 10.5% 6.8%
Rising 5.1% -1.3%

*31 January 1970 to 31 August 2021. Interest rate environments classified by US 10-year interest rate yield.
Source: Bloomberg, World Gold Council
 

How can gold help if we see an equity market correction?

The rally in equities since the pandemic erupted in March 2020 has been very impressive. But there are concerns that valuations have reached levels far beyond what the underlying economic fundamentals would suggest. And a more pessimistic view of global growth underlines the risk of a sharp correction.

The need for diversification is therefore hugely important. However, many assets become more correlated in times of heightened uncertainty meaning not all diversifiers protect portfolios when they need it most. Gold, on the other hand, behaves differently. Its negative correlation to risk assets increases when they sell off. What’s more, gold can also exhibit a positive correlation to risk assets when they are rising.

 

 

Chart 4: The gold price tends to increase in periods of systemic risk

Chart 4: The gold price tends to increase in periods of systemic risk

US equities, treasuries, and gold versus the VIX index*

Chart 4: The gold price tends to increase in periods of systemic risk
US equities, treasuries, and gold versus the VIX index*
*As of 31 December 2020. Return computations in US dollars for ‘US equities’: S&P 500 Index; ‘US treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM; and ‘VIX’: Cboe VIX Index. The VIX is available only after January 1990. For events occurring prior to that date annualised 30-day S&P 500 volatility is used as a proxy. Dates used: Black Monday: 9/1987 - 11/1987; LTCM: 8/1998; Dot-com: 3/2000 - 3/2001; September 11: 9/2001; 2002 recession: 3/2002 - 7/2002; global financial crisis (GFC): 10/2007 - 2/2009; Sovereign debt crisis I: 1/2010 - 6/2010; Sovereign debt crisis II: 2/2011 - 10/2011; Brexit: 23/6/2016 – 27/6/ 2016; 2018 pullback: 10/2018 - 12/2018; 2020 pullback: 31/1/2020 – 31/3/2020. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Data as of

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

*As of 31 December 2020. Return computations in US dollars for ‘US equities’: S&P 500 Index; ‘US treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM; and ‘VIX’: Cboe VIX Index. The VIX is available only after January 1990. For events occurring prior to that date annualised 30-day S&P 500 volatility is used as a proxy. Dates used: Black Monday: 9/1987 - 11/1987; LTCM: 8/1998; Dot-com: 3/2000 - 3/2001; September 11: 9/2001; 2002 recession: 3/2002 - 7/2002; global financial crisis (GFC): 10/2007 - 2/2009; Sovereign debt crisis I: 1/2010 - 6/2010; Sovereign debt crisis II: 2/2011 - 10/2011; Brexit: 23/6/2016 – 27/6/ 2016; 2018 pullback: 10/2018 - 12/2018; 2020 pullback: 31/1/2020 – 31/3/2020.

*As of 31 December 2020. Return computations in US dollars for ‘US equities’: S&P 500 Index; ‘Gold’: LBMA Gold Price PM; ‘US treasuries’: Bloomberg Barclays US Treasury Index; and ‘VIX’: Cboe VIX Index. The VIX is available only after January 1990. For events occurring prior to that date annualised 30-day S&P 500 volatility is used as a proxy. Dates used: Black Monday: 9/1987–11/1987; LTCM: 8/1998; Dot-com: 3/2000–3/2001; September 11: 9/2001; 2002 recession: 3/2002–7/2002; global financial crisis (GFC): 10/2007–2/2009; Sovereign debt crisis I: 1/2010–6/2010; Sovereign debt crisis II: 2/2011–10/2011; Brexit: 23/6/2016–27/6/ 2016; 2018 pullback: 10/2018–12/2018; 2020 pullback: 31/1/2020–31/3/2020.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

 

Gold market monitor

Table 3: 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)
July 3.6% 3.6% 2.4% 2.9% 4.4% 1.5% 3.7% 3.5% 0.4% 3.7% 6.1% 5.8%
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%
YTD -7.7% -2.5% -0.2% -6.4% -8.2% -2.6% -6.2% -8.8% 10.4% -9.1% -5.4% -1.4%

*As of 30 September 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 5: Year-to-date performance*

Chart 5: Year-to-date performance*

Chart 5: Year-to-date performance*
*To 30 September 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.

Data as of

*To 30 September 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 30 September 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 6: Gold price and moving averages*

Chart 6: Gold price and moving averages*

Chart 6: 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

Data as of

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.

‘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

 

 

Chart 7: COMEX net long positioning*

Chart 7: COMEX net long positioning*

Chart 7: COMEX net long positioning*
*To 28 September 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

Data as of

Sources: Bloomberg, World Gold Council; Disclaimer

*To 28 September 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.

*To 28 September 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

 

 

Chart 8: Gold ETF flows by region*

Chart 8: Gold ETF flows by region*

Chart 8: Gold ETF flows by region*
*To 30 September 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

Data as of

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

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

*To 30 September 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

 

 

Footnotes

1Based on the LBMA Gold Price PM as of 30 September 2021.

2A higher levels of weddings and the long National Day Holiday – a major shopping event - occur in October

3Pitru-Paksha is a 16-day period in Hindu calendar where Hindus pay homage to their ancestors.

4We regularly review the global gold-backed ETF universe and adjust the list of funds and holdings based on newly available data and information.

5Based on the LBMA Gold Price PM as of 30 September 2021.

6Based on the US 10-year Treasury Inflation-Protected Securities (TIPS) yield

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