SINGAPORE: Gold has been one of the best performing assets this year. It reached an all-time high of US$2,031 an ounce on Aug 7. Since attaining that pinnacle, it has retreated 8 per cent to a three-month low of US$1,859.
However, there are signs that there could be renewed interest in the metal. Its price has recovered above that and, importantly, the movement of the gold price this year has defied conventional wisdom.
GOLD VS EQUITIES
Since the start of the year, an ounce of the yellow metal has risen from $1,514 an ounce to $1,890 today. The 24 per cent rise has outperformed Singapore’s Straits Times Index’s 21 per cent decline, and the US Dow Jones Industrial index’s somewhat flattish performance for the year.
It has also outstripped the pedestrian 4 per cent rise in the MSCI World Index, which is a broad measure of the global stock market’s performance. But it has not quite matched the Nasdaq’s 32 per cent gain this year.
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It is unclear, based on this year’s data, whether gold’s outperformance in the last 10 months has been at the expense of equities. Historically, when investors shy away from risk assets such as shares, they tend to seek safe havens such as gold.
But whilst there is a hint of that happening in some markets, the data is not entirely convincing. For instance, it doesn’t entirely explain why gold and the Nasdaq have moved in near lockstep this year.
If we backtrack over the last two years, which was when gold first showed signs of gaining interest, the move from equities to the precious metal is almost as ambiguous.
Since January 2019, gold has risen 54 per cent from around US$1,246 an ounce to its current near-term high.
Over that period, the Dow Jones Industrial Average has climbed 25 per cent, whilst the Nasdaq has surged 38 per cent.
File photo of gold bars seen at a gold and silver separating plant. (Photo: Reuters/Leonhard Foeger/File Photo)
It is not conclusive that there has been a notable switch from equities to gold. But gold has outperformed both the broader US market and the tech-heavy index.
GOLD VS THE GREENBACK
What about the dollar? Gold is reckoned to be negatively correlated to the US dollar. The reasoning is that gold is both priced and traded in US dollars. Consequently, when the US dollar weakens, then it could be argued that it is cheaper to buy and hold gold.
Additionally, from a gold miner’s perspective, they will want more dollars for every ounce of gold that they dig out from the ground because the greenback is worth less.
But it is unclear if that has happened in the way we would expect this year. At the start of the year, the US dollar index stood at 96.5. At that time, gold was worth US$1,514 an ounce. On March 20, the dollar index rose to a high of 102.8.
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But rather than fall, gold unexpectedly rose to US$1,605 an ounce.
In mid-October, the dollar index had declined to 93.8. Gold rose to US$1,923. The upshot is that whilst the US dollar has only dropped 3 per cent this year, gold has rallied 24 per cent.
The move in the price of gold over the last two years could help to paint a clearer picture.
Since January 2019, the dollar index has dropped from 96.8 to 93.2, which is a 4 per cent decline in value against a basket of currencies that include the euro, the Swiss franc, the Japanese yen, and the Canadian dollar.
Meanwhile, gold’s 48 per cent rise over this period could suggest that investors are concerned that the dollar could fall further.
GOLD VS INTEREST RATES
Apart from equities and the US dollar, gold is also supposed to be negatively correlated to interest rates. The rationale is that there is an opportunity cost when an investor buys gold.
The cost to the investor is the loss of interest income that could have been earned if the cash stayed in the bank.
But the cut in interest rates by many central banks to almost zero has effectively eliminated the opportunity cost.
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