What a difference a year has made for gold.
In October 2018 the metal was in the doldrums.
Gold was trading below $1,200(£912)/oz on October 10 2018.
Futures market positioning in gold – an indication of market sentiment towards the metal – had fallen to its lowest level since 2001.
The market had shunned the metal, known for its defensive qualities, while equity markets were roaring.
Today (October 10 2019) however, gold is trading above $1,500/oz. Futures market positioning in the metal has recently reached an all-time high.
The rise of gold
So what has changed? Market perception of risks, both geopolitical and financial, have been revised upward.
- Gold is back in fashion, as other defensive assets are offering negative yields
- In times of stress, gold has a positive correlation with the US dollar
- Gold can be bought in bars, coins or ETPs
The ongoing trade war, primarily between the US and China, appears to be driving fears of a global economic slowdown.
Manufacturing, the sector most affected by a contraction in traded goods, is declining fast across the globe. Gold, playing true to its historically defensive traits has rallied as a result.
The policy response from global central banks to the economic slowdown has also aided gold’s ascent.
Gold typically has an inverse relationship with interest rates.
As policy rates across the world fall, gold prices rise.
In fact, a low-rate environment has driven more than $17tn of debt (mainly sovereign bonds) to become negatively yielding.
Gold, once criticised for not yielding anything, appears far better than other ‘anti-fragile’ assets that are negatively yielding.
In times of economic stress, many investors reach for safe haven assets and currencies.
Among this group of haven currencies are the US dollar, Swiss franc and Japanese yen. Gold is seen a pseudo-currency (also an historically safe-haven asset).
Usually gold (when priced in US dollars) has an inverse relationship with the US dollar.
But in times of stress, when they are both in demand, they often have a positive correlation. That describes the situation in the past few months.
Non-US investors who have bought gold in dollars have received a double boost: gold prices have risen and the dollar has appreciated.
Our modelling work indicates that gold has risen by more than what can be explained by just currency and interest rate movement.
The sentiment factor – that is, what we glean from the futures market positioning – is very important at this stage.
It indicates the market is fearful of an adverse fall-out.
It is not surprising given how little policy space central banks have today with interest rates already having hit the zero bound in many places.
Comments from the European Central Bank seem to advocate higher fiscal spending as the monetary authority appears to be running out of policy space.
Some investors are likely fearing that an age of experimental policymaking is ahead of us, once again seeking the comfort blanket of gold.
With gold clearly back in vogue, how best to access it? Gold can be bought as an investment in physical form – through coins or bars.