WGC’s September Gold Investor: Gold’s Fear Trade

Last month, the World Gold Council (WGC) released a new edition of Gold Investor. What can we learn from the report?

The autumn issue of the WGC’s Gold Investor contains stimulating articles, including pieces about global gold mining, the U.S. jewelry market or Russia’s role in the gold market. The report also includes some interesting news. First, the July launch of LMEprecious, a contract that allows investors to trade gold futures on-exchange in London, was successful – and the London Metal Exchange now publishes reference prices twice a day. Second, this year marks the 50^th anniversary of the launch of the Krugerrand – the most popular gold coin in the world.

However, we would like to focus on the article about the gold fear trade written by Frank Holmes, Chief Executive of U.S. Global Investors. He correctly points out gold’s safe-haven status. And Holmes believes that the investment case for gold is very compelling right now, due to unprecedented debt levels, rising pension deficits, an overvalued stock market, geopolitical tensions and the Fed’s tightening. In a sense, he is right: there are many uncertainties in the world, which support the gold prices.

However, it is not sufficient to note all the risks – they are always some risks in the marketplace. Surely, it is always prudent to have some gold, just in case. But what drives the price of gold is the dynamics of risk aversion, not the mere existence of potential dangers. The U.S. stock market may be overvalued, but markets can stay irrational longer than contrarian investors can stay solvent, especially given the rebound in the faith in Trump’s tax reform (which is bad news for the gold market). The global debt levels are really worrisome, but the U.S. households’ indebtedness has recently improved somewhat. And it is true that the Fed’s tightening usually led to recessions, but the current cycle is uniquely gradual, which minimizes the risk of a recession. Actually, there are some signs that global economic growth accelerates. Hence, it’s good to have gold in one’s portfolio, but investors should be cautious when they speculate on gold prices, betting on doomsday scenarios.

The second thought-provoking article is the piece on gold’s role in central bank and sovereign wealth fund portfolios. The authors point out that, in recent years, gold has risen to new prominence for sovereign investors as a portfolio asset, as it has low correlation with other assets (but a negative link with the US dollar), it preserves its value in real terms and it is highly liquid. The article also offers a nice comparison of gold’s performance during different macroeconomic periods. It hedges against both inflation (and it really shines during stagflation) and deflation. However, during periods of normal expansion, gold has historically underperformed financial assets. This may explain why gold remains in a sideway trend – it needs either a decisive rise in inflation or a threat of deflation to shine. Stay tuned!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

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