■ Despite the support of factors such as geopolitical tensions and high inflation, interest rate hikes and strong US dollar still had a serious negative impact on gold performance;
■ World Gold Association believes that positive factors that are beneficial to gold still exist, while adverse factors decline, which is expected to boost the demand for gold as a tool for long-term investment and value preservation.
Many investors said gold performance should have been stronger given the high global inflation rate that has not been seen in decades. But you may not know that in fact, as of now in 2022, gold performance has surpassed most major assets (Figure 1). In fact, in the United States and other places, gold performs much better than inflation-linked bond . The World Gold Council believes that as of now, gold's performance has reasonably reflected the basic trends of the various motivations behind it.
Figure 1: As of now, gold is one of the best performing assets*
* data as of September 21, 2022. The calculation is based on Bloomberg commodity index, US dollar spot index, BofA US 3-month Treasury index , LBMA midday gold price, Bloomberg US TIPs index, Bloomberg US comprehensive bond index , Bloomberg Global Comprehensive Bond Index, S&P 500 index , MSCI Global Index, Bloomberg Global Inflation-Linked Comprehensive Index, MSCI Emerging Markets Index and Nasdaq Comprehensive Index , all in US dollars.
Source: Bloomberg, ICE Benchmark Administration, World Gold Association
Let’s expand again. Gold performance is generally driven by four key factors: economic expansion, risk and uncertainty, opportunity cost, and potential energy.
In 2022, high risks and uncertainties have always supported gold performance; among them, geopolitical tensions are the most obvious factors. High inflation is also one of the reasons that drives gold performance, but different investors have different perspectives on inflation risks, which can be seen from the obvious differences between the US CPI trend and the long-term implicit inflation expectations of the bond market (Figure 2). In short, although the inflation rate continues to rise, U.S. bond investors believe that the Federal Reserve will take all necessary measures to effectively suppress inflation. However, other investors may have different opinions.
Figure 2: Bond investors expect the Fed to effectively reduce inflation*
* data as of August 31, 2022. Based on year-on-year changes in the US CPI and the US 5-year/5-year forward break-even inflation rate (derived from the difference between actual and nominal forward yields).
Source: Bloomberg, World Gold Association
Under the continuous rising interest rates and the strongest dollar pressure in 20 years, gold has to face higher opportunity costs [1]. Through a simple gold price model (based on real interest rates and US dollars only), it can be seen that gold should have fallen by more than 30% (Figure 3). The World Gold Council's short-term gold price performance attribution model (GRAM) shows that investors' negative sentiment, the sharp outflow of gold ETF, and the weak positioning of the futures market have also put more pressure on the gold market. Some time ago, demand in China also showed a sluggish state, which failed to boost global overall performance. Taking all aspects into consideration, gold's performance is sufficient to demonstrate its global appeal, as well as a subtle response to a wider range of variables.
Figure 3: If gold prices are determined only by interest rates and US dollars, their performance will be even weaker
* Data as of August 31, 2022. The gold price level is estimated using the OLS model, and the data range is from January 2007 to August 2022.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Future Outlook
World Gold Council believes that interest rates and the US dollar will still pose a threat to gold. After slackling in the early stage, central banks of various countries have begun to take positive measures to curb rising inflation rates. The Federal Reserve raised interest rates again by 75 basis points last week (September 19-25), and the fund's target interest rate reached 3.25%. The dot map forecast shows that the Fed may raise another 75-125 basis points before the end of the year. Meanwhile, Bank of England raised its target interest rate by an additional 50 basis points, Bank of Switzerland raised its target interest rate by 75 basis points, and central banks in other countries may follow suit.
As central banks of various countries chase each other and accelerate the pace of interest rate hikes, the frequency and amplitude of interest rate hikes have also made the market more sensitive to monetary policy than usual, and the gold market is no exception.
But the World Gold Council is still cautiously optimistic about gold.
On the one hand, given that there have been multiple rounds of tightening so far, the pace of interest rate hikes is expected to slow down, and other supporting factors of gold will also play a more important role. On the other hand, other central banks will be more determined to curb inflation while protecting their own currencies, which will also put pressure on the US dollar.
In addition, gold futures position has changed to a net short position again. From the historical perspective, it will not last long and will often return to the mean in the next few weeks. Meanwhile, central bank gold demand remains strong. Finally, as the recession and geopolitical risks increase, investors may turn off offense to defense, using defensive strategies to find high-quality liquid assets, such as gold, to reduce their investment losses.
Note:
[1]For example, in the 1970s, in addition to rising inflation, the weakness of the US dollar also supported the performance of gold
