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Is it time to hedge volatile stock holdings with an investment in gold?

Nov 26, 2018

 

  • The price of gold is our focus today as lagging global stocks, a strengthening US dollar, and prospects of slowed interest rate hikes combine to create a potentially bullish outlook for gold prices. 
     
  • Traditionally, gold is treated as a hedge against inflation and as a safe-haven asset amid volatile and unpredictable equity markets.
     
  • Gold is currently trading at a price of USD$1,223.38/ounce -- in 2018, the price of gold is down 7.05% from its value of USD$1,316.10/ounce on January 1st, 2018.
     
  • From its value of USD$2,925.51 on October 3rd, 2018, the S&P 500 has fallen 10.01% to USD$2,632.56/share, as seen in the chart below. Over that same time period, the price of gold has appreciated 1.69% to USD$1,223.38/ounce. A continued downturn in US stocks coupled with a downturn in global stocks will work to potentially drive further appreciation of gold prices. 
     
  • Current high levels of inflation, as indicated by growth in the US consumer price index (CPI) and producer price index (PPI) in 2018, should also work to create a favorable environment for gold prices. The United States has seen CPI and PPI growth above 2% for every month of 2018 -- the last time these indicators observed growth in excess of 2% over 10 consecutive months was from June 2011 through April 2012, when the price of gold appreciated by 7.84%, and from May 2011 through March 2012, when the price of gold appreciated by 7.42% respectively. 
     
  • Strength in the US dollar also supports a bullish environment for gold prices.  The Bloomberg Dollar Spot Index’s current value of 96.9920 is at the highest level seen since June 2017. Historically, gold prices diverge from the value of the US dollar amid a downturn in the latter. 
     
  • Prospects for deaccelerated interest rate hikes in 2019 by the US Federal Reserve also bolsters a long-term bull case for gold prices. A slowdown in the pace of interest rate hikes by the Fed will likely spark higher inflation of the US dollar, which may cause investors to increase gold holdings to hedge against inflation.
     
  • Although macroeconomic trends point towards a bullish environment for gold prices, levels of supply and demand, as seen in the graphs below, tell a different story.
     
  • Quarterly gold supplies have been steady since 2010, holding above 1,000 tons and remaining below 1,250 tons in every quarter since 1Q2010.  
     
  • Demand for gold, meanwhile, has faltered since 2010. Specifically looking at demand for gold in the technology industry, quarterly gold demand has fallen from levels consistently above 110 tons in 2010 to quarterly gold demand below 90 tons in 2018. Demand for gold with a purpose for investment, meanwhile, has largely fluctuated since 2010. On an aggregate basis, demand for gold in 2018 has held below 1,000 tons in all three quarters, suggesting low levels of demand for gold in 2018 relative to historical levels.
     
  • While indicators like a strengthening US dollar, volatile global stocks, and high inflation combine to form a bullish environment for gold, supply and demand levels for the precious metal tell a different story. Real use of gold, as measured by demand for gold in the technology industry, is low relative to historic levels while gold supplies have held steady. Although the current macroeconomic environment appears favorable for an investment in gold, gold supply and demand levels actually work against this thesis. Investors seeking to hedge their stock holdings with an investment in gold should tread cautiously and plan for at least a 1-year holding period.
     

 

Quarterly Gold Supply by Method

Quarterly Gold Demand - Technology

Quarterly Gold Demand - Investment