The year to date has been characterized by heightened risk aversion and panic, interspersed with relatively few periods of optimism.
And while Japan became the latest country offering negative interest rates on central-bank deposits this month, gold was surging: it has risen around 17% from the start of the year to its peak of around $1,260 in 2016.
Robin Bhar, metals analyst at Société Générale, says: “In recent weeks, we have seen a lot of concern about currency devaluation and further central-bank easing and that was a perfect storm for gold.”
The impact of low rates is crucial, reducing the cost disadvantage that has traditionally undermined gold.
Adrian Ash, head of research at BullionVault, says: “Negative deposit rates in the eurozone and Japan are now approaching commercial storage charges on physical bullion, while Swiss Libor and the Swedish Riksbank’s deposit rate already exceed even the higher fees of gold-backed exchange traded funds (ETFs).”
The cheapest major ETF is the iShares Gold Trust, says Ash, which charges 0.25% per annum, while the biggest gold ETF is the iShares SPDR, which costs 0.40%.
“Commercial storage rates for large-bar gold are nearer 0.10%,” says Ash. “Customers of BullionVault pay 0.12% per year.”
|Joni Teves, UBS|
“For monetary policy easing outside the US, the near-term reaction function could be muddled by currency moves versus the dollar, but in the long run, easing should be positive for gold.”
For now the impact of negative rates on gold are relatively modest because the costs are being absorbed by the banks, and have not yet been passed on to the public. However, the impact of negative rates will increase should the banks pass the cost on to consumers, says Teves.
Yet despite the falling costs of investing in gold, its investment case remains polarizing. The metal has seen strong moves in recent months amid market volatility and risk aversion since the start of the year, but many analysts believe that trend has now run its course.
SocGén’s Bhar says: “The US economy is looking pretty healthy given recent jobs data making rate rises more likely, even if we have to wait until 2H. At the very least, that is likely to cap gold performance, but more likely it is going to drive it down.”
UBS agrees gold is unlikely to continue its recent surge, predicting prices will stabilize and average $1,225 this year.
However, gold might look more attractive to non-dollar investors, especially for currencies that are weakening against the dollar.
“If we see the Bank of Japan or European Central Bank easing, gold may look attractive when purchased in yen or euros,” says Bhar.
Therefore, the case for holding gold often centres on diversification, and in some cases a lack of trust in the financial system itself. Although it pays no interest, its advocates argue it offers protection from inflationary, super-loose monetary policy that erodes the value of fiat currencies.
The perception of gold as a superior store of value to national currencies is at the heart of its appeal to many investors.
BullionVault’s Ash says: “Die-hard gold investors never trust the fiat money system. Central bankers make gold bugs of us all when they try desperate experiments to claim some pretence of control over the economy or markets.”
Yet gold’s worth as a store in value depends on the timeframe under consideration. It is clearly as capable of losing value as any fiat currency, regardless of central bankers’ inability to print more of the metal, as evidenced by its performance in the 1980s and 90s.
Because gold has only floated since 1971, there isn’t sufficient data out there to make a definitive case about gold’s performance as a store of value, relative to fiat currencies.
What is clear is that gold is sensitive to changes in interest rates – though more to the real inflation-adjusted rate than the nominal rate, and more to the direction of travel than the absolute level, says Ash.
Yields and gold moved in opposite directions in 60% of all months since 1970, he notes, while when real gold appreciated by 10% or more within 12 months, real 10-year US yields had risen only 35% of the time. Conversely, when real gold depreciated by 10% or more in a 12 month period, real 10-year yields had risen 74% of the time.
Despite this, the number of factors that influence the gold price make it unpredictable. It is a fear gauge, and is therefore driven by whatever is driving fear in the market, meaning it has no stable correlations with other asset classes.
At one period, gold might display a strong correlation with oil, at another with the US dollar, while at other times it will display no correlation – positive or negative – with either.
|Adrian Ash, BullionVault|
The same is true of equities. Much has been made of gold’s non-correlation with equities, but this comes about because “sometimes it shows a near-perfect positive connection, and sometimes a near-perfect negative relationship”, says Ash.
“Overall, those readings near +1.0 and -1.0 average out to zero.”
Those who have seen gold as a way of protecting themselves against the distortions in the banking system have also sometimes been disappointed: its poor performance in 2008 after the collapse of Lehman severely dented the investment case for gold among those who assumed they were the perfect circumstances for the archetypal safe-haven asset.
Bhar says: “While gold is seen as a safe haven at times of stress, it has underperformed when there is a crisis around funding. In a banking crisis, investors need to meet margin calls and have traditionally sold gold to meet that payments. So gold is arguably good to own in a crisis, as long as it isn’t a liquidity crisis.
“Gold is often a short-term hedge; it is less driven by longer-term geopolitical concerns. When the US invaded Kuwait and Iraq, the gold price surge only lasted about a week. Investors buy rumour and sell fact; when the price rises on the back of fear, they cash in.”
Of course, uncertainties remain in the market that could feed further rises for gold. A Chinese hard landing could trigger mass safe-haven flows in a country that has a strong cultural affinity with the yellow metal. A faltering global economy could lead to fresh bouts of quantitative easing in the US, fanning further fears about value erosion in fiat currencies.
However, most analysts are sticking to their earlier predictions of gradual but steady interest-rate rises in the US, and while there is no perfect indicator for gold, the best one available is that rising US rates will provide a challenging environment for the yellow metal.
After all, rising risk-free rates will boost real returns on non-speculative liquid assets that provide regular income streams.