Gold hits Record High!

Gold hits record high!

There has been a positive trend in the last few years for Gold but gold has become obviously more relevant as a hedge and accelerated its price performance in time of the pandemic Covid-19 with increasing by 17% in Q1 of 2020 and moving up by another 10% in July. It’s believed that the pandemic will bring shifts in structure of asset allocation and that there are strong reasons for supporting gold investment in the long term.

A new record high:
Gold broke a new high on 28th July, reaching US$1,940.9/oz on the LBMA Gold Price PM (PM Price) and topping US$1,981.3/oz intra-day. This exceeded the previous record of US$1,895.0/oz set by the PM Price on 5th September 2011 and the US$1,921.2/oz intra-day high the following day during Asian trading hours. Investors would like to know how this compares to previous highs and whether the price rally is sustainable? Gold’s performance so far in 2020 has been really outstanding. As of 28th July, it is up by 27%, significantly outpacing all major assets due to various factors:
- High uncertainty,
- Very low interest rates,
- Positive price momentum,
all of which are supportive of investment demand. Nevertheless, the pandemic is far from being over and the worldwide economy is to be determined. Hope for fast recovery are over and instead market participants are expecting a bumpy ride and a difficult recovery. Very high inflation or at least currency debasements are expected with central banks cutting interest rates, governments approving huge rescue packages in order to support their local economies.

To put things into perspective, the gold price more than doubled from approximately US$900/oz in early 2008 to its high more than three years later in the aftermath of the Global Financial Crisis. In contrast, it has increased by just under 30% since the beginning of the COVID-19 pandemic. Additionally, adjusted for inflation, the gold price today is ~US$200 shy of the 2011 level and well below its 21st January 1980 record high equivalent to approximately US$2,800/oz in today’s money. Historically, there is a positive correlation between gold’s price performance and positioning in the gold derivatives market. For most of this year, however, net long positions based on the Commitment of Traders (COT) report – usually associated with more speculative trading activity – were falling while the gold price was rising. This was due in part to COVID-19-related supply-side chain dislocations in the gold market affecting COMEX futures. Conversely, gold-backed ETFs and similar products (gold ETFs) have seen record inflows so far this year, collectively adding US$47.8 billion as of 27th July across all regions. Anecdotal evidence suggests that buy-and-hold investors are contributing to this, but also that some investors have pivoted from futures to gold ETFs. This shift gives rise to a few notably different dynamics, namely, gold ETFs are backed by physical bullion while futures can be cash settled or rolled, and only a fraction result in physical delivery. Moreover, futures also allow for greater leverage, which may further add to volatility.

Weak consumer demand:
Consumer demand has fallen drastically because of the negative effect of the pandemic on economic growth combined with lockdown measures while investors have embraced gold as means to hedge their portfolios and jewellery demand decreased by 46% in Q1 of 2020, bar and coin fell by 17% mainly driven by Asia. In the long term, will consumption contribute to the health of the gold market and its price behaviour while in the short term, consumers are more price takers than price makers.

Acceleration of Gold’s performance:
It took about four months for gold to go from US$1,650/oz to US$1,800/oz but less than 4 weeks to climb to about US$1,950/oz. While this uptick was driven in good part by a sharp depreciation of the US dollar, the magnitude of the change is highlighted by gold’s 14-day Relative Strength Index (RSI), which reached a high of 88 on 27th July. This is usually seen as a sign that the market could be overbought. That said, gold’s 3-month and 1-year rolling returns have moved by less than 2-standard deviations and are significantly below levels seen in previous periods of strong movements. This alternative metric suggests that the cumulative magnitude of gold’s move is not unprecedented.
Though nothing prevents an asset from outpacing some of these relative performance metrics, the speed of its increase may also result in a period of higher volatility. Gold has moved sharply higher in the past month and, while there is enough support for gold investment, the price may experience some consolidation.

Fundamentals:
There’s a strong case for gold investment demand to be well supported. The unusual nature of the COVID-19 pandemic may lead to changes in structure supporting gold’s performance in the long term. Gold’s dual nature, jewellery and technology require stability in the cyclical portion of demand to ensure a sustainable performance. In the past, during the Global Financial Crisis, emerging markets rebounded quickly, which helped maintain consumer demand. At the same time, elevated levels of uncertainty in developed markets, combined with expansionary monetary policies, kept gold’s performance well supported. Signs that economic activity in some countries such as China or Germany is beginning to normalise contrasting with the acceleration of COVID-19 cases in the US is negatively impacting the US dollar. Weaker dollar environment, ballooning deficits and expansionary monetary policies, is a reason for investors to add gold to their portfolios.

Historically, there has been an established connection between gold’s performance and the different segments of demand and supply. These, in turn, are influenced by four key drivers: economic expansion, risk and uncertainty, opportunity cost and momentum.

And while the World Gold Council does not forecast the price of gold, the web-based tool, Qaurum allows investors to understand how gold may perform under various macro-economic scenarios .
Qaurum is powered by the Gold Valuation Framework (GVF), an academically validated methodology, based on the principle that the price of gold and its performance can be explained by the interaction of demand and supply. It allows investors to assess how gold might react across different customisable economic environments and calculate the hypothetical performance of gold over the next five years as well its long-term 30-year implied return based on the GVF methodology.

For further information please contact us through our website www.liemeta.com.cy