Weekly market recap – Gold-blooded markets

Gold proves its worth as oil prices slip into negative territory.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 24th April 2020

A man who racked up $500,000 in debt from losing successive games of “rock, paper, scissors” has won a court battle in Quebec, Canada as the judge ruled the debt was invalid. The judge went on to say that wagering contracts must be related to activities “requiring only skill or bodily exertion on the parts of the parties” rather than mere chance.

Despite relying on skill, traders will have racked up their own debt last week as the oil price slipped into negative territory. Asset class returns in sterling and local currency are below; while the oil price plummeted into negative territory, gold has extended its winning streak leaving it the clear winner over one year in sterling terms.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

We touched on negative prices and the bizarre dynamics of the oil market in last week’s post, so this week we’ll look at another widely followed commodity – gold – which has drawn a significant attention in recent weeks. To begin with, we should understand that gold is unique within commodity markets. We can’t eat it, nor can we burn it to generate energy like we can with other commodities. And in addition, it has relatively low reactivity versus other elements, and has few practical applications in an industrial sense. So, what is it that is so special?

Interestingly, some of the first economic uses of gold are as a medium for exchange which have been traced back to somewhere in the 4th millennium B.C., with multiple civilisations through history having followed suit by using or basing their currencies around gold. It has only been within the last 50 years that economies have decoupled their currencies from having fixed exchange rate to gold (i.e. we can no longer exchange our US dollars or pounds sterling for a pre-specified weight of the metal), thus creating the fiat currency system we live with today. But this doesn’t mean the role of gold has changed; indeed, gold is still widely used as a store of value with many still classifying it as a currency rather than a commodity. It’s this long held association that gold stores value that gives it a “safe haven” status amongst investors, meaning it’s one of the most sought-after assets during periods of crisis.

Source: Bloomberg

Unlike fiat currencies such as the dollar or the euro, the finite amount of gold on Earth adds a complex dynamic to the gold price. This is because central banks have proved both their ability and their willingness to expand the money supply through vast asset purchase programmes (commonly referred to as printing money) which has eroded currencies’ real values. This is part of the reason your £1 today is worth less than what it was 50 years ago.

Source: Bloomberg

In addition to those mentioned above, there are other near-term pressures that could positively or negatively impact the gold price from here. One significant driver is the demand for gold from the jewellery industry where two of the largest importers are India and China. Both countries have seen weaker demand in their respective industries over recent months as the Covid-19 lockdowns and higher gold prices have impacted consumer habits and purchasing power.

While this means a large buyer in the market is potentially on the backfoot, some point to emerging central banks becoming increasingly large players in the gold market which acts as a potential counterbalance. Indeed Russian, Chinese and Indian central banks have all significantly increased their holdings in physical gold in recent years.

STAT OF THE WEEK: 70% – the estimated proportion of the population who need to be immune to achieve herd protection from Covid-19 (John Hopkins University).



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Contact Tertius

    Tertius Bonnin

    Tertius joined EQ in 2016 and is responsible for covering global and thematic equity investment ideas. He also sits on both the fund selection and strategic asset allocation committees while also supporting the portfolio managers across a range of other responsibilities.

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