The so-called ‘January effect’ – a phenomenon where stock prices generally rise early in the year – has been studied and debated for decades.1 And while its prevalence seems to be waning, it remains a popular internet search term… in January.2
Similarly, investors often ask us if the gold price is subject to any seasonal effects.3 We last wrote about this in the July edition of our Gold Market Commentary. And the short answer is that gold tends to perform well, on average, in both January and late summer.4
The January effect is, statistically, the strongest.5 Since 1971, gold has had an average return of 1.79% in January – almost three times its long-term monthly average.6 Over the same period, gold has had positive January returns almost 60% of the time, and nearly 70% of the time since 2000.
Chart 1: Gold tends to perform well in January and late summer
Average gold returns by month since 1971*
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
* Using returns of the LBMA Gold Price PM from January 1971 to November 2023 at the 90% confidence level. Note that the summer effect was traditionally seen in September but has moved forward to August over the past two decades. See:Gold Market Commentary: An unseasonal August may lie ahead. Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Of course, this doesn’t mean that gold prices rise every January. There’s been several years when it hasn’t, most recently in 2021 and 2022. Years with negative returns in January generally coincided with periods when the US dollar has strengthened – often significantly.7
So, what’s next? Evidence suggests that gold tends to do well in January and, given that the Fed’s monetary policy is now on hold, it is unlikely the US dollar – a common headwind – will rise significantly.8 Having said that, beyond any seasonality, there are various fundamental factors that can influence gold’s performance, as we discussed in our Gold Outlook 2024
3We refer here about price performance and not demand, which is also subject to regional seasonality.
4The late summer effect historically took place in September but has moved forward to August over the past two decades. The effect has been traditionally thought to be connected to market positioning ahead of a seasonally strong demand period for gold, but our analysis suggests that seasonal US Treasury weakness may be a more likely culprit.
5Using returns of the LBMA Gold Price PM from January 1971 to November 2023 at the 90% confidence level
6The average monthly return between January 1971 and November 2023 is 0.63%.
7Since 1971, the US dollar has strengthened 80% of the time by an average of 1.5% during January in years when the gold price has fallen.
8Needless to say, historical performance does not guarantee future performance.
Gold finished the year on a high, literally and metaphorically, as the LBMA Gold Price PM reached a new historical record of US$2,078.40/oz on 28 December – the final afternoon auction of 2023.1
Gold rose 14.6% on the year, defying expectations amid a high interest rate environment and outpacing commodities, bonds and emerging market stocks.
Gold’s positive performance was linked to a combination of factors:
Strong central bank demand
Robust retail demand in key markets
And increased geopolitical risk, especially in the last part of the year.
Stay tuned for our upcoming Gold Market Commentary, scheduled for 9 January, for a deeper dive into the factors behind gold’s feat and our near-term expectations.
In the meantime, you can read our Gold Outlook 2024, where we explore three likely economic scenarios for this year and their impact on gold.
Chart 1: Gold was one of the best performing assets in 2023*
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
*As of 31 December 2023. Annual returns calculated using the last available value for the year in USD of MSCI US Total Return Index, MSCI World ex US Total Return Index, LBMA Gold Price PM, MSCI EM Total Return Index, Bloomberg Barclays US Bond Aggregate, ICE BofA US 3-Month Treasury Bills, Bloomberg Barclays Global Treasury ex US, Bloomberg Commodity Total Return Index.
Footnotes
1There was no afternoon auction on Friday 29 December, but the morning session, which occurs at 10 am GMT, settled at US$2,062.40/oz that day – less than 1% below the record high. The LBMA Gold Price PM traded around that same level – US$2,067.55/oz – on 2 January 2024.
Last week, we held an investor webinar with a focus on geopolitics, macro-economics and asset allocation in 2024. Joe Cavatoni, our Market Strategist for the Americas was joined for an insightful dialogue with two seasoned investment experts.
We were delighted to host Rebecca Patterson, Economic & Financial Markets Expert and Former Chief Investment Strategist for Bridgewater Associates and Tina Fordham, Geopolitical Strategist and Founder of Fordham Global Foresight, the first chief political analyst on Wall Street.
In this insightful episode hosted by John Reade and Joseph Cavatoni from the World Gold Council, guest Karim Chedid, Head of EMEA Investment Strategy for iShares and a Managing Director at BlackRock, discusses the current macroeconomic environment.
Chedid examines the key factors shaping the economy, the debate between a hard and soft landing, and the indicators that hint at future economic directions. He elaborates on the Federal Reserve's potential actions, including possible earlier rate cuts, and their implications on assets like gold.
Chedid also explores major themes affecting investment portfolios, such as AI, geopolitical dynamics, energy, materials, and the future of finance. Highlighting the trend of increasing cash allocations in portfolios, he advises on the significance of this shift and the strategic incorporation of alternative assets like gold for optimal portfolio allocation.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
Gold has reached continuous highs in March and is trading close to US$2,200/oz
Gold’s price increase of 6.5% m-t-d1 can, in part, be explained by a weaker USD, as well as higher risk and momentum...
...but other factors such as ‘technicals’ and over-the-counter (OTC) activity likely accelerated the move
Looking forward, a sustained rally could trigger further investment flows but gold remains sensitive towards bond yield volatility in the short term.
A market searching for the trigger
The gold price has shot up since the end of February, with the LBMA Gold Price PM trading at US$2,180.45/oz as of 11 March – a 6.5% increase m-t-d. Gold has reached consecutive record highs six days in a row and flirted with US$2,200/oz last Friday (8 March) in intra-day trading.
Chart 1: Gold reaches new highs in early March
LBMA Gold Price PM in USD per ounce*
*As of 11 March 2024.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Gold’s sharp increase has since caught the attention of market participants. The initial trigger was linked to a weak ISM print in the US on 1 March,2 pushing bond yields and the US dollar down.
But that can only explain so much, so what’s behind gold’s move since? Our analysis, using a weekly version of our Gold Return Attribution Model (GRAM), indicates that gold’s performance can partly be explained by a few factors:
US dollar weakness against both developed and emerging market currencies3
An increase in market volatility
More bullish COMEX investor positioning
A drop in 10-year US Treasury yields.
Chart 2: Gold’s recent move can be partly explained by the USD, risk and momentum
Key drivers of gold’s return by week*
*Data to 8 March 2024. Our Gold Return Attribution Model (GRAM) is a multiple regression model of weekly gold price returns, which we group into four key thematic driver categories of gold’s performance: economic expansion, risk & uncertainty, opportunity cost, and momentum. These themes capture motives behind gold demand; most importantly, investment demand, which is considered the marginal driver of gold price returns in the short run. ‘Unexplained’ represents the percentage change in the gold price that is not explained by factors already included. Results shown here are based on analysis covering an estimation period from 19 March 2021 to 8 March 2024.
Source: Bloomberg, World Gold Council
There is, however, a good portion of gold’s recent performance that can’t be explained by GRAM which - as with any other model - depends on the strength of historical relationships. As such, there are a few other factors that may explain the additional increase.
Firstly, gold’s rapid increase and its surge above a series of technical resistance and psychological levels from US$2,050 to US$2,100/oz likely served as a catalyst to cover short option strategies and drove further tactical investor interest. COMEX net long positioning – used by GRAM - comes with a lag and may not yet capture this data, although it could be inferred by more timely information on Open Interest.
Secondly, there’s also activity in the OTC market that may not be reflected in COMEX positioning or gold ETF flows but that likely provided further fuel to the market.
What’s next?
The key question now is how sustainable gold’s rally is.
On the flip side, the upcoming US Federal Open Market Committee meeting will shed light on the Fed’s appetite to loosen monetary policy amidst downward revisions to previous non-farm payrolls reports and a slight uptick in unemployment.4 And while the market is not currently expecting a rate cut in March, a more hawkish stance by the Fed may create short-term headwinds for gold. In addition, rapid gold price movements typically discourage gold jewellery consumers, who may choose to wait for volatility to subside.
3The US dollar weakness has been supported by additional soft economic releases and expectations of interest rate differentials between the US and other regions.
Money is an odd thing. Like language, it is something we use every day, but when you start asking questions about it, difficulties arise almost immediately. How do you define money? How is it created? How does its value change, especially with respect to inflation?
Rather than getting caught up in definitions and origin stories, it is perhaps much easier to look at the jobs money does, and how well different types of money (of which there are many) perform their given roles.
Generally speaking, the things we use as money have three main jobs – a system of account, a means of payment and exchange, and a store of wealth. It is with respect to the latter two that questions about the usefulness of gold, especially as a store of wealth over time, come to the fore.
In any economy, there are two basic choices – consumption or saving. Consumption is an act in the present for the present, and reflects the economy’s basic function, that of subsistence. Once subsistence is taken care of, we can think about saving – an act undertaken in the present with an eye to the future.
It is no coincidence therefore that the jobs money does reflects these ‘now or later’ economic choices we are faced with. Money as a means of payment and exchange helps to effect our consumption choices in the present. As a store of wealth, money helps us anticipate our future needs and desires.
When we acknowledge this temporal framework for money, we can then ask how well a particular type of money does the jobs asked of it. One way of measuring this is through inflation and deflation. Inflation – too much money chasing too few goods – suggests money’s job as a means of payment and exchange for consumption has become dominant. Conversely, deflation suggests saving, the delaying of consumption to the future, is in the ascendancy.
The post-1971 economic period, following President Nixon’s closing of the gold window, has been one characterised by almost continuous inflation. Notwithstanding central banks’ 2% inflation targets, this suggests the fiat money system is one which allows money’s role as a means of payment and exchange to dominate.
It is notable that during the same period, the price of gold in dollars has risen from the fixed $35 per ounce level of the Bretton Woods era to around $2000 at present. While gold isn’t currently used as a means of payment on a day-to-day level, this rise in price suggests its ability to fulfil the role of a store of wealth for the future remains undiminished – especially when judged in terms of national currencies, which have a tendency to inflate as the monetary base grows with credit expansion and increasing government debt.
In what unfortunately seems to be an era of growing international conflict and uncertainty, recent record central bank buying of gold suggests the metal’s role as a reserve asset and a superior monetary store of wealth is once again coming to the fore.
Retail gold flows suggest investors in the East are well aware of the monetary metal’s value, and it seems like only a matter of time before investors in the West reacquaint themselves with gold’s benefits as part of a diversified investment portfolio and start to make asset allocations to reflect this.
About
Charles Crowson is a former macro portfolio manager and author of ‘Jam Tomorrow? Why Time Really Matters in Economics’.
In this episode of "Unearthed," hosts Joe Cavatoni and John Reade speak with Randy Smallwood, President & CEO of Wheaton Precious Metals, discussing the innovative streaming business model that has significantly influenced the precious metals industry. As Wheaton celebrates its 20th anniversary, Randy shares insights into how this model has facilitated capital provision in exchange for byproduct production from mining operations, particularly gold and silver, establishing Wheaton as a major industry player.
The conversation covers the robust gold market, driven by central bank purchases from BRIC countries, and the industrial demand and growth potential for silver. Challenges such as the decrease in new mining projects, stringent permitting processes, and the necessity for community support are examined, alongside the impact of automation and AI on improving mining efficiencies. Randy concludes with personal anecdotes and the unique value and recyclability of gold, offering a thorough perspective on the precious metals sector's financing models, market trends, and sustainability considerations.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
There is no question that the week of August 5th, 2024, will be one to remember. The performance of assets, especially risk assets, raised significant questions and comparisons as investors experienced levels of volatility that we have not seen since the onset of COVID (which is now more than four years ago). Global equities were severely impacted and at their peak, the S&P 500 and NASDAQ were off over four and six percent, respectively, on Monday of that week.
Market events of this nature are a good opportunity to step back and remind ourselves of the fundamentals of each asset class and an opportune time to assess how they performed against our expectations. Did the composition of my portfolio perform as expected during these extreme market conditions?
In that context, there has been an increased level of rhetoric regarding cryptocurrencies and the use of bitcoin as an “inflation hedge” or a store of value. Some even say bitcoin is “digital gold.” Numerous market researchers and journalists are challenging that premise, and concluding this is not the case.
We feel the best way to compare bitcoin and gold is to look at the numbers, starting with returns. Over the past five years, gold and bitcoin have provided strong returns. There is no question that bitcoin has offered significant upside (and sometimes downside) - but at what cost as compared to gold?
*Returns from August 2019 to August 2024. Sources: Bloomberg, World Gold Council
Let’s dig deeper and focus first on volatility. Simply put, gold and bitcoin sit at the opposite ends of the volatility spectrum. On a five-year rolling basis, the data shows a rather clear picture: gold is less volatile.
Gold and major asset 5-year average daily volatility - annualised
*Annualised volatility is computed based on daily returns in US dollars between 31 December 2018 and 31 December 2023. Indices used: Bloomberg Global Aggregate Bond Index, MSCI Daily Gross World Index; MSCI Daily Gross EM; MSCI USA Index; LBMA Gold Price
Gold has long demonstrated its role as a safe haven asset, which is supported through clear use cases by central banks, long-term investment holdings and global savings, so its volatility is on the lower end of the spectrum of comparative assets. Bitcoin’s strongest use case, as described by the major asset managers, is its position as an indicator of overall blockchain adoption, making its performance and volatility closer to technology stocks.
Year to date results, including the most recent market correction, further confirm that gold and bitcoin have significantly different profiles.
Gold and major asset weekly volatilities across different horizons
*The table is computed based on daily and weekly returns in US dollars between July 2014 and July 2024. Indices used: Bloomberg Global Aggregate Bond Index, MSCI Daily Gross World Index; MSCI Daily Gross EM; MSCI USA Index; LBMA Gold Price PM, Bloomberg Commodity Index, Bloomberg WTI Crude Oil; S&P Listed Private Equity Index; FTSE Nareit Equity REITs Index USD, Bloomberg Bitcoin Spot.
Let’s now look at correlation. Again, the numbers demonstrate that bitcoin and gold have different drivers and in times of increased stress in market conditions, gold provides a unique impact on a diversified portfolio. Looking at data both year to date and averaging over the past five years, gold’s performance provides positive correlation in up markets, and negative correlation in down markets.
Historical correlations to S&P 500
*Data as of 9 August 2024. Correlations calculated using weekly returns from August 2019 through August 2024. Sources: Bloomberg, World Gold council
Looking a bit closer at the one-year weekly rolling correlations with the S&P 500, the 2022 Russian invasion of Ukraine provides a market moment that amplifies gold’s role as a safe haven and performance that separates it from bitcoin.
1 -year weekly rolling correlation to S&P 500
*Data as of 09 August 2024. The 1-year weekly rolling correlation is calculated from weekly closing prices. Sources: Bloomberg, world Gold Council
This provides further support that gold is accepted on a global scale, without restriction, as a store of value that protects investors from risk.
And lastly, let’s examine the returns on a risk adjusted basis using a diversified portfolio to demonstrate the case. We’ve simulated the performance impact on this portfolio by adding an allocation ranging from 2.5% up to 10% and assessed the impact at the varying levels of allocation. It’s clear from our analysis that a gold allocation reduces volatility while providing improved returns and does so consistently even with an increased level of allocation. However, that is not the case for bitcoin. The more you allocate, the higher the risk.
*Based on US dollar performance between 30 July 2010 and 31 July 2024. The hypothetical average portfolio: 50% allocation to equities (40% MSCI World Net Total Return Index, 5% MSCI EM Net Total Return Index, 5% MSCI World Small Cap Net Total Return Index), 40% allocation to fixed income (20% Bloomberg US Treasury Index, 15% Bloomberg US Corporate Bond Index, 5% Bloomberg US Corporate High Yield Total Return Index) and 10% allocation to alternative assets (3.3% FTSE REITs Index, 3.3% HFRI Hedge Fund Index and 3.3% Bloomberg Commodity Index). The allocation to gold and bitcoin comes from proportionally reducing all assets. Risk-adjusted returns are calculated as the annualized return/annualized volatility. See important disclaimers and disclosures at the end of this report. Source: Bloomberg, ICE Benchmark Administration, World Gold Council
It is critical to remember, and a point amplified during the week of August 5th, that to truly be a safe haven asset, the right kind of performance during significant market drawdowns is key. What you can find is that once established, bitcoin has not demonstrated the same characteristics as gold at those critical moments. When you expect protection against significant market moves, bitcoin tracked risk assets.
*Sources: Bloomberg, World Gold Council. *As of 09 August 2024. Return computations in US dollars for ‘S&P 500’: S&P 500 Index; ‘Bitcoin’: Bloomberg Bitcoin Index; ‘Gold’: LBMA Gold Price PM. Dates used: Brexit: 23/6/2016 - 27/6/2016; 2018 pullback: 10/2018 - 12/2018; 2020 pullback: 31/1/2020 - 31/3/2020; 2022 pullback: 1/2022 – 10/2022; 2024 Mag-7 pullback: 23/7/2024 – 05/08/2024.
The addition of gold to a portfolio provides demonstrated diversification, while bitcoin doesn’t offer any genuine diversification: the addition of bitcoin is the same as increasing exposure to high-risk equities (such as tech stocks, further supporting the most common use case for bitcoin being a proxy for blockchain adoption).
*Based on US dollar performance between 30 July 2010 and 31 July 2024. The hypothetical average portfolio: 50% allocation to equities (40% MSCI World Net Total Return Index, 5% MSCI EM Net Total Return Index, 5% MSCI World Small Cap Net Total Return Index), 40% allocation to fixed income (20% Bloomberg US Treasury Index, 15% Bloomberg US Corporate Bond Index, 5% Bloomberg US Corporate High Yield Total Return Index) and 10% allocation to alternative assets (3.3% FTSE REITs Index, 3.3% HFRI Hedge Fund Index and 3.3% Bloomberg Commodity Index). The allocation to gold and bitcoin comes from proportionally reducing all assets. Risk-adjusted returns are calculated as the annualized return/annualized volatility. See important disclaimers and disclosures at the end of this report. Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Allocating gold to the portfolio provides an increasing level of risk adjusted return at any level of allocation. Holding it for the past decade (rebalancing as required) would have increased the risk adjusted returns and lowered volatility.
Allocating bitcoin to a portfolio and holding it for the past decade (rebalancing) would have increased the risk adjusted return at a certain level, in this case 2.5%. However, beyond that allocation level, the portfolio volatility would have been higher; drawdowns greater; the risk adjusted return would deteriorate.
The data demonstrates that gold and bitcoin are very different investments, each with unique characteristics and risks. While bitcoin may bring certain benefits to a diversified portfolio, the data shows that it is not an equivalent investment to gold or substitute for gold as it adds risk through increased volatility and returns comparable to high-risk equity assets.
md
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You asked, we answered: Is there a January effect for gold?
Juan Carlos Artigas
Regional CEO (Americas) and Global Head of Research World Gold CouncilThe so-called ‘January effect’ – a phenomenon where stock prices generally rise early in the year – has been studied and debated for decades.1 And while its prevalence seems to be waning, it remains a popular internet search term… in January.2
Similarly, investors often ask us if the gold price is subject to any seasonal effects.3 We last wrote about this in the July edition of our Gold Market Commentary. And the short answer is that gold tends to perform well, on average, in both January and late summer.4
The January effect is, statistically, the strongest.5 Since 1971, gold has had an average return of 1.79% in January – almost three times its long-term monthly average.6 Over the same period, gold has had positive January returns almost 60% of the time, and nearly 70% of the time since 2000.
Chart 1: Gold tends to perform well in January and late summer
Average gold returns by month since 1971*
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
* Using returns of the LBMA Gold Price PM from January 1971 to November 2023 at the 90% confidence level. Note that the summer effect was traditionally seen in September but has moved forward to August over the past two decades. See: Gold Market Commentary: An unseasonal August may lie ahead.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
What’s behind this strength? Our analysis suggests that gold’s January performance may be related to portfolio rebalancing as well as a possible response to seasonal weakness in real yields. The timing also coincides with gold re-stocking in East Asia ahead of the lunar New Year, which could play a role.
Of course, this doesn’t mean that gold prices rise every January. There’s been several years when it hasn’t, most recently in 2021 and 2022. Years with negative returns in January generally coincided with periods when the US dollar has strengthened – often significantly.7
So, what’s next? Evidence suggests that gold tends to do well in January and, given that the Fed’s monetary policy is now on hold, it is unlikely the US dollar – a common headwind – will rise significantly.8 Having said that, beyond any seasonality, there are various fundamental factors that can influence gold’s performance, as we discussed in our Gold Outlook 2024
Footnotes
1Is the 'January Effect' a tradeable seasonal strategy? James Chen, Investopedia, December 2023.
2January Effect - Explore - Google Trends
3We refer here about price performance and not demand, which is also subject to regional seasonality.
4The late summer effect historically took place in September but has moved forward to August over the past two decades. The effect has been traditionally thought to be connected to market positioning ahead of a seasonally strong demand period for gold, but our analysis suggests that seasonal US Treasury weakness may be a more likely culprit.
5Using returns of the LBMA Gold Price PM from January 1971 to November 2023 at the 90% confidence level
6The average monthly return between January 1971 and November 2023 is 0.63%.
7Since 1971, the US dollar has strengthened 80% of the time by an average of 1.5% during January in years when the gold price has fallen.
8Needless to say, historical performance does not guarantee future performance.
Gold among top 2023 performers
Juan Carlos Artigas
Regional CEO (Americas) and Global Head of Research World Gold CouncilGold finished the year on a high, literally and metaphorically, as the LBMA Gold Price PM reached a new historical record of US$2,078.40/oz on 28 December – the final afternoon auction of 2023.1
Gold rose 14.6% on the year, defying expectations amid a high interest rate environment and outpacing commodities, bonds and emerging market stocks.
Gold’s positive performance was linked to a combination of factors:
Stay tuned for our upcoming Gold Market Commentary, scheduled for 9 January, for a deeper dive into the factors behind gold’s feat and our near-term expectations.
In the meantime, you can read our Gold Outlook 2024, where we explore three likely economic scenarios for this year and their impact on gold.
Chart 1: Gold was one of the best performing assets in 2023*
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
*As of 31 December 2023. Annual returns calculated using the last available value for the year in USD of MSCI US Total Return Index, MSCI World ex US Total Return Index, LBMA Gold Price PM, MSCI EM Total Return Index, Bloomberg Barclays US Bond Aggregate, ICE BofA US 3-Month Treasury Bills, Bloomberg Barclays Global Treasury ex US, Bloomberg Commodity Total Return Index.
Footnotes
1There was no afternoon auction on Friday 29 December, but the morning session, which occurs at 10 am GMT, settled at US$2,062.40/oz that day – less than 1% below the record high. The LBMA Gold Price PM traded around that same level – US$2,067.55/oz – on 2 January 2024.
Geopolitics, macro-economics and asset allocation in 2024
Claire Lincoln
Global Head of Institutional Investor Relationships World Gold CouncilLast week, we held an investor webinar with a focus on geopolitics, macro-economics and asset allocation in 2024. Joe Cavatoni, our Market Strategist for the Americas was joined for an insightful dialogue with two seasoned investment experts.
We were delighted to host Rebecca Patterson, Economic & Financial Markets Expert and Former Chief Investment Strategist for Bridgewater Associates and Tina Fordham, Geopolitical Strategist and Founder of Fordham Global Foresight, the first chief political analyst on Wall Street.
Unearthed: Hard, soft or no landing ft. Karim Chedid, BlackRock
Unearthed Podcast
World Gold CouncilIn this insightful episode hosted by John Reade and Joseph Cavatoni from the World Gold Council, guest Karim Chedid, Head of EMEA Investment Strategy for iShares and a Managing Director at BlackRock, discusses the current macroeconomic environment.
Chedid examines the key factors shaping the economy, the debate between a hard and soft landing, and the indicators that hint at future economic directions. He elaborates on the Federal Reserve's potential actions, including possible earlier rate cuts, and their implications on assets like gold.
Chedid also explores major themes affecting investment portfolios, such as AI, geopolitical dynamics, energy, materials, and the future of finance. Highlighting the trend of increasing cash allocations in portfolios, he advises on the significance of this shift and the strategic incorporation of alternative assets like gold for optimal portfolio allocation.
Disclaimer
Important information and disclaimers
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All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other content is the intellectual property of the respective third party and all rights are reserved to them.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below. Information and statistics are copyright © and/or other intellectual property of the World Gold Council or its affiliates or third-party providers identified herein. All rights of the respective owners are reserved.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus or other identified copyright owners as their source. World Gold Council is affiliated with Metals Focus.
The World Gold Council and its affiliates do not guarantee the accuracy or completeness of any information nor accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is for educational purposes only and by receiving this information, you agree with its intended purpose. Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
You asked, we answered: What’s behind gold’s March rally?
Juan Carlos Artigas
Regional CEO (Americas) and Global Head of Research World Gold CouncilA market searching for the trigger
The gold price has shot up since the end of February, with the LBMA Gold Price PM trading at US$2,180.45/oz as of 11 March – a 6.5% increase m-t-d. Gold has reached consecutive record highs six days in a row and flirted with US$2,200/oz last Friday (8 March) in intra-day trading.
Chart 1: Gold reaches new highs in early March
LBMA Gold Price PM in USD per ounce*
*As of 11 March 2024.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Gold’s sharp increase has since caught the attention of market participants. The initial trigger was linked to a weak ISM print in the US on 1 March,2 pushing bond yields and the US dollar down.
But that can only explain so much, so what’s behind gold’s move since? Our analysis, using a weekly version of our Gold Return Attribution Model (GRAM), indicates that gold’s performance can partly be explained by a few factors:
Chart 2: Gold’s recent move can be partly explained by the USD, risk and momentum
Key drivers of gold’s return by week*
*Data to 8 March 2024. Our Gold Return Attribution Model (GRAM) is a multiple regression model of weekly gold price returns, which we group into four key thematic driver categories of gold’s performance: economic expansion, risk & uncertainty, opportunity cost, and momentum. These themes capture motives behind gold demand; most importantly, investment demand, which is considered the marginal driver of gold price returns in the short run. ‘Unexplained’ represents the percentage change in the gold price that is not explained by factors already included. Results shown here are based on analysis covering an estimation period from 19 March 2021 to 8 March 2024.
Source: Bloomberg, World Gold Council
There is, however, a good portion of gold’s recent performance that can’t be explained by GRAM which - as with any other model - depends on the strength of historical relationships. As such, there are a few other factors that may explain the additional increase.
Firstly, gold’s rapid increase and its surge above a series of technical resistance and psychological levels from US$2,050 to US$2,100/oz likely served as a catalyst to cover short option strategies and drove further tactical investor interest. COMEX net long positioning – used by GRAM - comes with a lag and may not yet capture this data, although it could be inferred by more timely information on Open Interest.
Secondly, there’s also activity in the OTC market that may not be reflected in COMEX positioning or gold ETF flows but that likely provided further fuel to the market.
What’s next?
The key question now is how sustainable gold’s rally is.
On the plus side, gold started March aided by strong Chinese demand during the Spring Festival. And central banks have continued with their buying spree in 2024. In fact, we have highlighted in previous reports that gold’s strong performance over the past few years can be partly explained by geopolitical risk as well as robust central bank purchases – which are often reported with a lag. Finally, upcoming expiries in options markets may bring additional investment flows if the gold price remains above key psychological levels such as US$2,100/oz, which can be supported by continued US dollar weakness.
On the flip side, the upcoming US Federal Open Market Committee meeting will shed light on the Fed’s appetite to loosen monetary policy amidst downward revisions to previous non-farm payrolls reports and a slight uptick in unemployment.4 And while the market is not currently expecting a rate cut in March, a more hawkish stance by the Fed may create short-term headwinds for gold. In addition, rapid gold price movements typically discourage gold jewellery consumers, who may choose to wait for volatility to subside.
Stay tuned for our March Gold Market Commentary in early April for further insights.
Footnotes
1As of 11 March 2024, based on the LBMA Gold Price PM USD.
2US manufacturing contracts further, rays of light on the horizon | Reuters.
3The US dollar weakness has been supported by additional soft economic releases and expectations of interest rate differentials between the US and other regions.
4Feb US payrolls show labor market healthy but not overly tight | Reuters.
Gold – and the jobs money does
Charles Crowson
Former macro portfolio manager and authorMoney is an odd thing. Like language, it is something we use every day, but when you start asking questions about it, difficulties arise almost immediately. How do you define money? How is it created? How does its value change, especially with respect to inflation?
Rather than getting caught up in definitions and origin stories, it is perhaps much easier to look at the jobs money does, and how well different types of money (of which there are many) perform their given roles.
Generally speaking, the things we use as money have three main jobs – a system of account, a means of payment and exchange, and a store of wealth. It is with respect to the latter two that questions about the usefulness of gold, especially as a store of wealth over time, come to the fore.
In any economy, there are two basic choices – consumption or saving. Consumption is an act in the present for the present, and reflects the economy’s basic function, that of subsistence. Once subsistence is taken care of, we can think about saving – an act undertaken in the present with an eye to the future.
It is no coincidence therefore that the jobs money does reflects these ‘now or later’ economic choices we are faced with. Money as a means of payment and exchange helps to effect our consumption choices in the present. As a store of wealth, money helps us anticipate our future needs and desires.
When we acknowledge this temporal framework for money, we can then ask how well a particular type of money does the jobs asked of it. One way of measuring this is through inflation and deflation. Inflation – too much money chasing too few goods – suggests money’s job as a means of payment and exchange for consumption has become dominant. Conversely, deflation suggests saving, the delaying of consumption to the future, is in the ascendancy.
The post-1971 economic period, following President Nixon’s closing of the gold window, has been one characterised by almost continuous inflation. Notwithstanding central banks’ 2% inflation targets, this suggests the fiat money system is one which allows money’s role as a means of payment and exchange to dominate.
It is notable that during the same period, the price of gold in dollars has risen from the fixed $35 per ounce level of the Bretton Woods era to around $2000 at present. While gold isn’t currently used as a means of payment on a day-to-day level, this rise in price suggests its ability to fulfil the role of a store of wealth for the future remains undiminished – especially when judged in terms of national currencies, which have a tendency to inflate as the monetary base grows with credit expansion and increasing government debt.
In what unfortunately seems to be an era of growing international conflict and uncertainty, recent record central bank buying of gold suggests the metal’s role as a reserve asset and a superior monetary store of wealth is once again coming to the fore.
Retail gold flows suggest investors in the East are well aware of the monetary metal’s value, and it seems like only a matter of time before investors in the West reacquaint themselves with gold’s benefits as part of a diversified investment portfolio and start to make asset allocations to reflect this.
About
Charles Crowson is a former macro portfolio manager and author of ‘Jam Tomorrow? Why Time Really Matters in Economics’.
Unearthed: Gold outlook for 2024 and beyond featuring Randy Smallwood, President & CEO Wheaton Precious Metals
Unearthed Podcast
World Gold CouncilIn this episode of "Unearthed," hosts Joe Cavatoni and John Reade speak with Randy Smallwood, President & CEO of Wheaton Precious Metals, discussing the innovative streaming business model that has significantly influenced the precious metals industry. As Wheaton celebrates its 20th anniversary, Randy shares insights into how this model has facilitated capital provision in exchange for byproduct production from mining operations, particularly gold and silver, establishing Wheaton as a major industry player.
The conversation covers the robust gold market, driven by central bank purchases from BRIC countries, and the industrial demand and growth potential for silver. Challenges such as the decrease in new mining projects, stringent permitting processes, and the necessity for community support are examined, alongside the impact of automation and AI on improving mining efficiencies. Randy concludes with personal anecdotes and the unique value and recyclability of gold, offering a thorough perspective on the precious metals sector's financing models, market trends, and sustainability considerations.
Disclaimer
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Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
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Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
Why bitcoin isn’t the new gold
Joseph Cavatoni
Senior Market Strategist, North America World Gold CouncilJohn Reade
Senior Market Strategist World Gold CouncilThere is no question that the week of August 5th, 2024, will be one to remember. The performance of assets, especially risk assets, raised significant questions and comparisons as investors experienced levels of volatility that we have not seen since the onset of COVID (which is now more than four years ago). Global equities were severely impacted and at their peak, the S&P 500 and NASDAQ were off over four and six percent, respectively, on Monday of that week.
Market events of this nature are a good opportunity to step back and remind ourselves of the fundamentals of each asset class and an opportune time to assess how they performed against our expectations. Did the composition of my portfolio perform as expected during these extreme market conditions?
In that context, there has been an increased level of rhetoric regarding cryptocurrencies and the use of bitcoin as an “inflation hedge” or a store of value. Some even say bitcoin is “digital gold.” Numerous market researchers and journalists are challenging that premise, and concluding this is not the case.
We feel the best way to compare bitcoin and gold is to look at the numbers, starting with returns. Over the past five years, gold and bitcoin have provided strong returns. There is no question that bitcoin has offered significant upside (and sometimes downside) - but at what cost as compared to gold?
Let’s dig deeper and focus first on volatility. Simply put, gold and bitcoin sit at the opposite ends of the volatility spectrum. On a five-year rolling basis, the data shows a rather clear picture: gold is less volatile.
Gold and major asset 5-year average daily volatility - annualised
Gold has long demonstrated its role as a safe haven asset, which is supported through clear use cases by central banks, long-term investment holdings and global savings, so its volatility is on the lower end of the spectrum of comparative assets. Bitcoin’s strongest use case, as described by the major asset managers, is its position as an indicator of overall blockchain adoption, making its performance and volatility closer to technology stocks.
Year to date results, including the most recent market correction, further confirm that gold and bitcoin have significantly different profiles.
Gold and major asset weekly volatilities across different horizons
*The table is computed based on daily and weekly returns in US dollars between July 2014 and July 2024. Indices used: Bloomberg Global Aggregate Bond Index, MSCI Daily Gross World Index; MSCI Daily Gross EM; MSCI USA Index; LBMA Gold Price PM, Bloomberg Commodity Index, Bloomberg WTI Crude Oil; S&P Listed Private Equity Index; FTSE Nareit Equity REITs Index USD, Bloomberg Bitcoin Spot.
Let’s now look at correlation. Again, the numbers demonstrate that bitcoin and gold have different drivers and in times of increased stress in market conditions, gold provides a unique impact on a diversified portfolio. Looking at data both year to date and averaging over the past five years, gold’s performance provides positive correlation in up markets, and negative correlation in down markets.
Historical correlations to S&P 500
Looking a bit closer at the one-year weekly rolling correlations with the S&P 500, the 2022 Russian invasion of Ukraine provides a market moment that amplifies gold’s role as a safe haven and performance that separates it from bitcoin.
1 -year weekly rolling correlation to S&P 500
This provides further support that gold is accepted on a global scale, without restriction, as a store of value that protects investors from risk.
And lastly, let’s examine the returns on a risk adjusted basis using a diversified portfolio to demonstrate the case. We’ve simulated the performance impact on this portfolio by adding an allocation ranging from 2.5% up to 10% and assessed the impact at the varying levels of allocation. It’s clear from our analysis that a gold allocation reduces volatility while providing improved returns and does so consistently even with an increased level of allocation. However, that is not the case for bitcoin. The more you allocate, the higher the risk.
*Based on US dollar performance between 30 July 2010 and 31 July 2024. The hypothetical average portfolio: 50% allocation to equities (40% MSCI World Net Total Return Index, 5% MSCI EM Net Total Return Index, 5% MSCI World Small Cap Net Total Return Index), 40% allocation to fixed income (20% Bloomberg US Treasury Index, 15% Bloomberg US Corporate Bond Index, 5% Bloomberg US Corporate High Yield Total Return Index) and 10% allocation to alternative assets (3.3% FTSE REITs Index, 3.3% HFRI Hedge Fund Index and 3.3% Bloomberg Commodity Index). The allocation to gold and bitcoin comes from proportionally reducing all assets. Risk-adjusted returns are calculated as the annualized return/annualized volatility. See important disclaimers and disclosures at the end of this report.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
It is critical to remember, and a point amplified during the week of August 5th, that to truly be a safe haven asset, the right kind of performance during significant market drawdowns is key. What you can find is that once established, bitcoin has not demonstrated the same characteristics as gold at those critical moments. When you expect protection against significant market moves, bitcoin tracked risk assets.
*Sources: Bloomberg, World Gold Council.
*As of 09 August 2024. Return computations in US dollars for ‘S&P 500’: S&P 500 Index; ‘Bitcoin’: Bloomberg Bitcoin Index; ‘Gold’: LBMA Gold Price PM. Dates used: Brexit: 23/6/2016 - 27/6/2016; 2018 pullback: 10/2018 - 12/2018; 2020 pullback: 31/1/2020 - 31/3/2020; 2022 pullback: 1/2022 – 10/2022; 2024 Mag-7 pullback: 23/7/2024 – 05/08/2024.
The addition of gold to a portfolio provides demonstrated diversification, while bitcoin doesn’t offer any genuine diversification: the addition of bitcoin is the same as increasing exposure to high-risk equities (such as tech stocks, further supporting the most common use case for bitcoin being a proxy for blockchain adoption).
*Based on US dollar performance between 30 July 2010 and 31 July 2024. The hypothetical average portfolio: 50% allocation to equities (40% MSCI World Net Total Return Index, 5% MSCI EM Net Total Return Index, 5% MSCI World Small Cap Net Total Return Index), 40% allocation to fixed income (20% Bloomberg US Treasury Index, 15% Bloomberg US Corporate Bond Index, 5% Bloomberg US Corporate High Yield Total Return Index) and 10% allocation to alternative assets (3.3% FTSE REITs Index, 3.3% HFRI Hedge Fund Index and 3.3% Bloomberg Commodity Index). The allocation to gold and bitcoin comes from proportionally reducing all assets. Risk-adjusted returns are calculated as the annualized return/annualized volatility. See important disclaimers and disclosures at the end of this report.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Allocating gold to the portfolio provides an increasing level of risk adjusted return at any level of allocation. Holding it for the past decade (rebalancing as required) would have increased the risk adjusted returns and lowered volatility.
Allocating bitcoin to a portfolio and holding it for the past decade (rebalancing) would have increased the risk adjusted return at a certain level, in this case 2.5%. However, beyond that allocation level, the portfolio volatility would have been higher; drawdowns greater; the risk adjusted return would deteriorate.
The data demonstrates that gold and bitcoin are very different investments, each with unique characteristics and risks. While bitcoin may bring certain benefits to a diversified portfolio, the data shows that it is not an equivalent investment to gold or substitute for gold as it adds risk through increased volatility and returns comparable to high-risk equity assets.