"Gold is money. Everything else is credit.", said John Pierpont Morgan. When borrowers default, markets collapse and banks run into crisis, gold prices skyrocket. Gold is trading at a 12-month high on March 18th.
Gold has been valued for thousands of years. Gold has unique properties. It has been enchanting women and men since humans set foot on the planet.
Polycrisis. That aptly describes the current times. The US regional bank crisis haunts markets. Credit Suisse - the bank to the wealthiest was so frail that Swiss National Bank had to step in to provide liquidity backstop. Regulators worked over the weekend to broker an acquisition by UBS to prevent a banking crisis from spreading. Inflation is raging hot at levels unseen in 40+ years. Compounding Chair Powell's quagmire, the US Fed has been forced to switch from QT to QE by providing support to its regional banks from collapsing under crisis of confidence. Geo-politics remains tricky.
In times of crisis, investors seek flight to safety. Safest of all assets since civilisation began has been gold.
This educational piece provides an overview of (a) physical gold market dynamics, (b) largest holders of gold reserves, and (c) gold price behaviour against other asset classes. It also describes five primary reasons for investing in gold, contrasts six methods of doing so, and highlights the downsides of holding gold.
PHYSICAL GOLD DYNAMICS
Gold performs multiple functions. It is a currency to some. Store of wealth to others. It is an industrial metal used in consumer electronics. The rich love gold in clothing and food.
A bird's eye view of physical gold can be summarily described in three parts:
1. Consumers: Gold is used in consumer electronics due to its high conductivity and low corrosive properties. Gold used as industrial metal represents 6%-8% of total demand. Unsurprisingly, >50% of global gold demand is for jewellery. Jewellery is a multi-tasker. It meets aesthetic goals, serves as a status symbol while also being a form of investment.
2. Gold Reserves: Central banks hold gold as reserves. They are the most significant holders of gold. The haven nature of gold compels central banks to increase holdings during economic uncertainty, high inflation, or currency devaluation. Central Banks added >382 tonnes to their reserves in 2022.
3. Producers: Gold mining is a cyclical industry. Mining output has been in decline over the past decade as major gold producers shift to mining minerals and other metals like copper with the proliferation of lithium-ion batteries in EVs. Gold mining took a huge output hit during the pandemic and may not recover any time soon as capital expenditure into new gold mines is limited.
GOLD RESERVES - THE MOVERS AND SHAKERS
According to the World Gold Council, as of end 2022, central banks in Western European (11.8k tons) have the largest gold reserves followed by North Americans (8.1k tons), Central & Eastern Europeans (3.5k tons), and East Asians (3.4k tons).
Last year, central banks of Turkey, China, Egypt, Qatar, and Uzbekistan were the largest buyers of gold.
FIVE REASONS WHY GOLD SHOULD BE IN INVESTMENT PORTFOLIOS
Gold is a resilient store of wealth, provides meaningful portfolio diversification, has limited price volatility, extends benefits of hedge against inflation & currency debasement, and is limited in supply.
1. Resilient Store of Wealth
Gold outperforms equities during periods of economic instability. Due to its material properties and scarcity, it can even become more valuable during such periods as investors seek shelter in classic risk-off assets such as gold.
2. Portfolio Diversification
Gold can have both positive and negative correlation with other asset classes during different periods. This makes it an attractive addition to a diversified portfolio.
3. Limited Volatility
Due to its large market size and diverse supply origins, gold is less volatile than equities and other asset classes making it a safer asset class for investors.
4. Inflation Hedge
Gold is often seen as an inflation hedge. Which means that it can maintain its value or appreciate during periods of high inflation due to its scarcity and safety.
However, in some cases monetary policy changes like interest rate hikes may make gold a less attractive investment compared to treasury yields during inflationary periods.
5. Limited in supply
Gold is a finite resource, that too, one of the rarest precious metals in the world. Moreover, more than 200,000 tonnes of gold have already been dug up.
This represents more than half of the total reserves. The gold that is yet to be mined is much more difficult to extract economically.
Scarcity creates rarity, which in turn drives the value of the existing gold higher.
Many governments, banks, and people also use gold as a long-term investment, which means a huge portion of the gold supply is taken out of circulation, shrinking available supply even more.
SIX WAYS OF INVESTING IN GOLD
There are multiple ways of investing in gold. Six primary ones are:
1. Physical Gold: Gold can be bought and stored in the form of jewellery or gold bars. Costs of storage, insurance and making charges can be substantial and also inconvenient. Investing in physical gold is not optimal for reasons of poor convenience and higher transaction costs.
2. Gold ETF: Exposure to gold can also be acquired through buying exchange traded funds (ETF) backed by physical gold. There are multiple ETFs that track physical gold prices. The SPDR Gold Shares ETF (GLD) was the pioneer and began trading in 2004. It has an expense ratio of 0.4% and tracks gold bullion prices. GLD holds both physical gold bullion and cash.
GLD provides a liquid lower-cost method to buy and hold gold. Gold can be bought and sold during the trading day at market price. Investors must pay heed to taxation as gains from ETFs in some jurisdictions can be treated differently compared to other forms of gold.
3. Gold Futures: CME’s COMEX Gold futures is the world’s most liquid derivatives which enables capital efficient exposure to Gold. With round the clock liquidity, tight bid-ask spread and benefits of a cleared contract, investing through COMEX Gold futures is widely popular.
Each lot of COMEX Gold Futures provides exposure to 100 oz of Gold. Enabling affordable access to investors and to facilitate accurate granular hedging, CME also offers Micro Gold Futures. Each lot of Micro Gold contract provides exposure to 10 oz of Gold.
4. Gold Options: CME also offers options on Gold Futures. Gold options is a useful investing and hedging tool. Using options, investors can lock in unlimited upside potential of price moves while limiting the adverse impact of downside price moves.
5. Shares of Gold Producers: Gold mining is an international business. Gold is mined on every continent except Antarctica. Top gold miners include Newmont (USA), Barrick (Canada), Anglogold Ashanti (South Africa), Kinross (Canada), Gold Fields (South Africa), Newcrest (Australia), Agnica Eagle (Canada), Polyus (Russia), Polymetal (Russia), and Harmony (South Africa).
As is evident from the chart above, investing in gold miners for exposure to gold is a poor proxy as most of them have underperformed relative to gold prices. Furthermore, FX exposures must be hedged separately for some stocks which trade in emerging markets. In summary, securing gold exposure through miners is not optimal relative to other alternatives.
6. Gold CFDs: CFDs also known as contract for differences allows for synthetic access to the price of spot gold. These CFDs are OTC derivatives contracts which carry non-trivial counterparty risk with investors being exposed to the credit risk of the CFD provider.
The table below summarises the merits of various gold investment instruments across key investment attributes.
GOLD TOO HAS ITS DOWNSIDES
Gold is a non-yielding asset. Shares of profitable companies pay dividends. Holding debt earns interest. Real estate delivers rents. But gold provides zero yield.
For every problem, innovation in markets provides a solution. In a future paper, Mint Finance will demonstrate how gold can be transformed into a yield generating asset.
Rising interest rates are headwinds to gold. As rates on treasury, bonds and deposits rise, investors rotate their money out of gold and into yield generating assets.
Not only is gold non-yielding, but the returns also fade into insignificance relative to gains from innovation. In times of crisis, gold is a great hedge. However, while positioning portfolios for the long term, investors must astutely balance between safety versus growth.
GOLD RETURNS IN RELATION TO OTHER ASSET CLASSES
1. US Equities and Emerging Markets
Gold outperforms equities during periods of crisis. During equity bull runs, gold underperforms equities. Cumulatively, over the last 20 years, Gold has outperformed Dow Jones, S&P 500, and MSCI Emerging Markets. Only Nasdaq, which represents tech, innovation and growth has surpassed gold returns.
2. Treasuries with 2-Year and 10-Year Maturities
Unsurprisingly, when sovereign risks rise and treasury yields fall to zero, gold shines. Between two non-yielding assets, investors prefer to take shelter in gold as a preferred haven. However, when rates rise, investors rotate out of gold and into treasuries.
3. Crude Oil, Copper, and Silver
Over the last two decades, Gold has outperformed crude oil, copper, and silver.
4. Dollar Index, Bitcoin and Ethereum
While US Dollar and gold are both global reserves, gold has outperformed the Dollar Index which is the value of the USD against a basket of six international currencies.
However, relative to bitcoin and ethereum, gold pales into insignificance. Bitcoin is perceived as millennial gold and ethereum is the millennial oil. Both assets have obliterated gold in terms of price returns.
5. Major Currencies
Over the last 3 years, as markets emerged out of the pandemic, gold has outperformed all the major currencies. Yen, under the influence of Governor Kuroda’s liberal QE program, has depreciated 63% against gold.
Indian Rupee has deflated 47% while Euro and Sterling have shed 38% and 32% against gold.
The US Dollar, Chinese Renminbi, and Aussie Dollar have depreciated 31%, 29% and 20% against gold, respectively.
Key Takeaways
Gold is money. Everything else is credit. Gold glows in crisis. It is a knight in shining armour for investors. Gold is the only asset which exhibits negative correlation.
These are times of polycrisis. As investors seek flight to safety from banks even, gold is the safest among the few remaining alternatives.
Gold is a resilient store of wealth, offers durable diversification within a portfolio, exhibits much lower volatility relative to equities, and serves as an inflation hedge albeit with less than a perfect record.
Clients can invest in gold in multiple ways. Gold futures is the most convenient and optimal among the six alternatives.
Gold has its downsides. It is a non-yielding asset and performs dismally against innovation and growth.
Except for Nasdaq, bitcoin and ethereum, gold has outperformed currency majors, equity indices, US treasury, and commodities.
In a future paper, Mint Finance will explore ways in which gold can be transformed into a yield generating asset.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
DISCLAIMER
Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or needs of any person.
Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of future performance.
All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience.
Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk.
These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject Mint Finance to any registration or licensing requirement.
Gold has been valued for thousands of years. Gold has unique properties. It has been enchanting women and men since humans set foot on the planet.
Polycrisis. That aptly describes the current times. The US regional bank crisis haunts markets. Credit Suisse - the bank to the wealthiest was so frail that Swiss National Bank had to step in to provide liquidity backstop. Regulators worked over the weekend to broker an acquisition by UBS to prevent a banking crisis from spreading. Inflation is raging hot at levels unseen in 40+ years. Compounding Chair Powell's quagmire, the US Fed has been forced to switch from QT to QE by providing support to its regional banks from collapsing under crisis of confidence. Geo-politics remains tricky.
In times of crisis, investors seek flight to safety. Safest of all assets since civilisation began has been gold.
This educational piece provides an overview of (a) physical gold market dynamics, (b) largest holders of gold reserves, and (c) gold price behaviour against other asset classes. It also describes five primary reasons for investing in gold, contrasts six methods of doing so, and highlights the downsides of holding gold.
PHYSICAL GOLD DYNAMICS
Gold performs multiple functions. It is a currency to some. Store of wealth to others. It is an industrial metal used in consumer electronics. The rich love gold in clothing and food.
A bird's eye view of physical gold can be summarily described in three parts:
1. Consumers: Gold is used in consumer electronics due to its high conductivity and low corrosive properties. Gold used as industrial metal represents 6%-8% of total demand. Unsurprisingly, >50% of global gold demand is for jewellery. Jewellery is a multi-tasker. It meets aesthetic goals, serves as a status symbol while also being a form of investment.
2. Gold Reserves: Central banks hold gold as reserves. They are the most significant holders of gold. The haven nature of gold compels central banks to increase holdings during economic uncertainty, high inflation, or currency devaluation. Central Banks added >382 tonnes to their reserves in 2022.
3. Producers: Gold mining is a cyclical industry. Mining output has been in decline over the past decade as major gold producers shift to mining minerals and other metals like copper with the proliferation of lithium-ion batteries in EVs. Gold mining took a huge output hit during the pandemic and may not recover any time soon as capital expenditure into new gold mines is limited.
GOLD RESERVES - THE MOVERS AND SHAKERS
According to the World Gold Council, as of end 2022, central banks in Western European (11.8k tons) have the largest gold reserves followed by North Americans (8.1k tons), Central & Eastern Europeans (3.5k tons), and East Asians (3.4k tons).
Last year, central banks of Turkey, China, Egypt, Qatar, and Uzbekistan were the largest buyers of gold.
FIVE REASONS WHY GOLD SHOULD BE IN INVESTMENT PORTFOLIOS
Gold is a resilient store of wealth, provides meaningful portfolio diversification, has limited price volatility, extends benefits of hedge against inflation & currency debasement, and is limited in supply.
1. Resilient Store of Wealth
Gold outperforms equities during periods of economic instability. Due to its material properties and scarcity, it can even become more valuable during such periods as investors seek shelter in classic risk-off assets such as gold.
2. Portfolio Diversification
Gold can have both positive and negative correlation with other asset classes during different periods. This makes it an attractive addition to a diversified portfolio.
3. Limited Volatility
Due to its large market size and diverse supply origins, gold is less volatile than equities and other asset classes making it a safer asset class for investors.
4. Inflation Hedge
Gold is often seen as an inflation hedge. Which means that it can maintain its value or appreciate during periods of high inflation due to its scarcity and safety.
However, in some cases monetary policy changes like interest rate hikes may make gold a less attractive investment compared to treasury yields during inflationary periods.
5. Limited in supply
Gold is a finite resource, that too, one of the rarest precious metals in the world. Moreover, more than 200,000 tonnes of gold have already been dug up.
This represents more than half of the total reserves. The gold that is yet to be mined is much more difficult to extract economically.
Scarcity creates rarity, which in turn drives the value of the existing gold higher.
Many governments, banks, and people also use gold as a long-term investment, which means a huge portion of the gold supply is taken out of circulation, shrinking available supply even more.
SIX WAYS OF INVESTING IN GOLD
There are multiple ways of investing in gold. Six primary ones are:
1. Physical Gold: Gold can be bought and stored in the form of jewellery or gold bars. Costs of storage, insurance and making charges can be substantial and also inconvenient. Investing in physical gold is not optimal for reasons of poor convenience and higher transaction costs.
2. Gold ETF: Exposure to gold can also be acquired through buying exchange traded funds (ETF) backed by physical gold. There are multiple ETFs that track physical gold prices. The SPDR Gold Shares ETF (GLD) was the pioneer and began trading in 2004. It has an expense ratio of 0.4% and tracks gold bullion prices. GLD holds both physical gold bullion and cash.
GLD provides a liquid lower-cost method to buy and hold gold. Gold can be bought and sold during the trading day at market price. Investors must pay heed to taxation as gains from ETFs in some jurisdictions can be treated differently compared to other forms of gold.
3. Gold Futures: CME’s COMEX Gold futures is the world’s most liquid derivatives which enables capital efficient exposure to Gold. With round the clock liquidity, tight bid-ask spread and benefits of a cleared contract, investing through COMEX Gold futures is widely popular.
Each lot of COMEX Gold Futures provides exposure to 100 oz of Gold. Enabling affordable access to investors and to facilitate accurate granular hedging, CME also offers Micro Gold Futures. Each lot of Micro Gold contract provides exposure to 10 oz of Gold.
4. Gold Options: CME also offers options on Gold Futures. Gold options is a useful investing and hedging tool. Using options, investors can lock in unlimited upside potential of price moves while limiting the adverse impact of downside price moves.
5. Shares of Gold Producers: Gold mining is an international business. Gold is mined on every continent except Antarctica. Top gold miners include Newmont (USA), Barrick (Canada), Anglogold Ashanti (South Africa), Kinross (Canada), Gold Fields (South Africa), Newcrest (Australia), Agnica Eagle (Canada), Polyus (Russia), Polymetal (Russia), and Harmony (South Africa).
As is evident from the chart above, investing in gold miners for exposure to gold is a poor proxy as most of them have underperformed relative to gold prices. Furthermore, FX exposures must be hedged separately for some stocks which trade in emerging markets. In summary, securing gold exposure through miners is not optimal relative to other alternatives.
6. Gold CFDs: CFDs also known as contract for differences allows for synthetic access to the price of spot gold. These CFDs are OTC derivatives contracts which carry non-trivial counterparty risk with investors being exposed to the credit risk of the CFD provider.
The table below summarises the merits of various gold investment instruments across key investment attributes.
GOLD TOO HAS ITS DOWNSIDES
Gold is a non-yielding asset. Shares of profitable companies pay dividends. Holding debt earns interest. Real estate delivers rents. But gold provides zero yield.
For every problem, innovation in markets provides a solution. In a future paper, Mint Finance will demonstrate how gold can be transformed into a yield generating asset.
Rising interest rates are headwinds to gold. As rates on treasury, bonds and deposits rise, investors rotate their money out of gold and into yield generating assets.
Not only is gold non-yielding, but the returns also fade into insignificance relative to gains from innovation. In times of crisis, gold is a great hedge. However, while positioning portfolios for the long term, investors must astutely balance between safety versus growth.
GOLD RETURNS IN RELATION TO OTHER ASSET CLASSES
1. US Equities and Emerging Markets
Gold outperforms equities during periods of crisis. During equity bull runs, gold underperforms equities. Cumulatively, over the last 20 years, Gold has outperformed Dow Jones, S&P 500, and MSCI Emerging Markets. Only Nasdaq, which represents tech, innovation and growth has surpassed gold returns.
2. Treasuries with 2-Year and 10-Year Maturities
Unsurprisingly, when sovereign risks rise and treasury yields fall to zero, gold shines. Between two non-yielding assets, investors prefer to take shelter in gold as a preferred haven. However, when rates rise, investors rotate out of gold and into treasuries.
3. Crude Oil, Copper, and Silver
Over the last two decades, Gold has outperformed crude oil, copper, and silver.
4. Dollar Index, Bitcoin and Ethereum
While US Dollar and gold are both global reserves, gold has outperformed the Dollar Index which is the value of the USD against a basket of six international currencies.
However, relative to bitcoin and ethereum, gold pales into insignificance. Bitcoin is perceived as millennial gold and ethereum is the millennial oil. Both assets have obliterated gold in terms of price returns.
5. Major Currencies
Over the last 3 years, as markets emerged out of the pandemic, gold has outperformed all the major currencies. Yen, under the influence of Governor Kuroda’s liberal QE program, has depreciated 63% against gold.
Indian Rupee has deflated 47% while Euro and Sterling have shed 38% and 32% against gold.
The US Dollar, Chinese Renminbi, and Aussie Dollar have depreciated 31%, 29% and 20% against gold, respectively.
Key Takeaways
Gold is money. Everything else is credit. Gold glows in crisis. It is a knight in shining armour for investors. Gold is the only asset which exhibits negative correlation.
These are times of polycrisis. As investors seek flight to safety from banks even, gold is the safest among the few remaining alternatives.
Gold is a resilient store of wealth, offers durable diversification within a portfolio, exhibits much lower volatility relative to equities, and serves as an inflation hedge albeit with less than a perfect record.
Clients can invest in gold in multiple ways. Gold futures is the most convenient and optimal among the six alternatives.
Gold has its downsides. It is a non-yielding asset and performs dismally against innovation and growth.
Except for Nasdaq, bitcoin and ethereum, gold has outperformed currency majors, equity indices, US treasury, and commodities.
In a future paper, Mint Finance will explore ways in which gold can be transformed into a yield generating asset.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
DISCLAIMER
Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or needs of any person.
Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of future performance.
All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience.
Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk.
These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject Mint Finance to any registration or licensing requirement.
Full Disclaimer - linktr.ee/mintfinance
In January and February, central banks collectively bought a net 125 tonnes of the metal, the highest amount for the year-to-date period since banks became net buyers in 2010.
www.usfunds.com/reso...pace-so-far-in-2023/