The Gold Market Today
August 15, 2022
Researching the gold market and finding a reliable platform to invest money in gold can be difficult, especially without any background information on the gold market. In popular articles about the gold market there may be terms like 'range bound', or the top five key factors that are affecting the gold market. But what do they actually mean? This article is going to walk you through the basics of the gold market by giving a brief history and explaining where the gold market stands today.We’ve all been there–you have 5000 subscribers to an opt-in email marketing list, so why aren’t they opening it?
There are many credible people that believe interest rates rising make fixed-income investments a more likely choice, and therefore will lead to a more profitable investment in such as the money market funds, and away from gold when the interest rates rise. Despite this argument, the gold market has been stable, and continues to be stable even as rates rise.This can be seen through:
- Gold has been range bound since mid-2020: Gold has steadily traded in a range around US$1,700/oz-US$1,900/oz since mid-2020,averaging US$1,837/oz, and traded just above in June at an average US$1,845/oz.
- A balanced outlook from gold’s key drivers: When speaking short-term, gold’s major drivers are balanced by trends in money supply, dollar strength, geopolitical and general risk. We see a balance between downward pressure from monetary drivers and upward support from geopolitical and systemic risks, leaving gold relatively flat this year.
- Gold-linked crypto gaining share: In contrast to many purportedly ‘stable’ coins which have collapsed in the recent crypto correction, Pax Gold and Tether Gold have boosted their crypto market cap share.
Gold has remained range bound since mid-2020
Gold has remained range bound since mid-2020, trading between US$1,700/oz and US$1,900/oz. Following a major rerating starting in late 2019 after averaging just US$1,206/oz in the gold bear market from 2013-2018 (Figure 1). These strong breaks out of the lower range since mid-2020 have been marked by extreme external shocks sending gold above US$2,000/oz. The first was during the peak-fear phaseof the global health crisis in August 2020 and the second in March 2022, with spiking geopolitical risk on Russia’s Ukraine invasion. Apart from these shocks, the market seems to be valuing gold at around US$1,840/oz since June 2020.
Long-term money supply expansion a major gold drive
One method of valuing gold over longer periods is viewing it as a currency and comparing it to the money supply. Looking over the past three decades, you can see that the gold price should rise proportionately to increases in the money supply (Figure 2). Applying this to the US money supply, we can see that the gold price has roughly tracked US M2 based on the 1990-2022 data.
The main divergences can be easily explained with context. There was a moderate lag in gold price versus M2 through the late 1990s and early 2000s, and an overvaluation of gold post the 2008-2009 financial crisis, with a reversion back to the trend by 2015. The gold price also jumped ahead of M2 in 2020, but this appears to have been in anticipation of a major money supply expansion in reaction to the global health crisis, which did in fact come through in 2021 and 2022.
Shifts in real yields, US$ can be short-term gold catalysts
In the short to medium term the gold price is also driven by other key factors, including moves in real bond yields and the US dollar. For real yields, investors will shift between bonds and gold depending on the real relative opportunity cost of holding these instruments, with bonds becoming more attractive to investors as their yields rise, in contrast to ‘yield-less’ gold, and vice versa. With the rare situation over the past year and a half where US 10-year real bond yields turned heavily negative, hitting a low of-6.4% in March 2022, the cost of holding physical gold or gold ETFs, at around just1-2%, has looked comparably attractive, supporting gold (Figure 3).
The US dollar can also be a key short-term driver of gold, as the metal is widely priced in this currency, so theoretically the two will tend to move inversely, although there are some rarer periods where gold and the US$ move in tandem.
The major rise in the US dollar index, a measure of the US dollar versus a basket of currencies, from 89.4 in January 2021 to 105.5in January 2022, has therefore put downward pressure on the gold price (Figure4). This ramp up in the US$ has been driven by Fed hiking rates higher and faster than those in other major regions, drawing in capital inflows to chase these higher yields, pushing up demand for the US$.
The outlook for five key factors driving the gold price
When considering the outlook for gold for the rest of the year there are three quantifiable factors to look at, gold’s role as a general risk hedge, gold versus the US$, and gold versus the money supply. The other two factors are less easily measured but can be but into quantifiable terms. Each of these factor’s potential effect on gold over the rest of 2022will be labeled as either negative, neutral, or positive.
Gold versus the money supply (Negative): The Fed in recent months has made the first concerted slowdown of its balance sheet expansion in many years. This indicates that the overall money supply could also be declining, which would imply downward pressure on the gold price. While this would be negative for gold, as we have seen in Figure 1, the adjustment can take years, and so this effect will likely not be that strong in 2022.
Gold versus real yields (Negative): With the Fed clearly not being held back by the fallout in equity markets and set to continue with rate hikes, and inflation pausing over the past quarter, real yields could become less negative. They have already risen off their -5.6% lowsin May 2022, and a continued move back toward even zero would likely be a very negative driver for gold in 2022. However, while we might have already expected this to have put more pressure on gold, its price has continued to hold up well, suggesting other offsetting factors, especially rising geopolitical and general risk. It could also indicate that the market expects that Fed to be eventually forced off its aggressive path if the equity markets continue down and the economy falters.
Gold versus the US$ (Neutral): The rise of the US dollar has continued, following a brief pause in early May 2022, which will also be pressuring gold. With inflation surging in Europe and Japan,however, they may both need to shift to monetary tightening, thus reducing the widening interest rate differential between these regions and the US. Offsetting this somewhat may be China, which has recently eased its monetary policy. Overall,we expect that market anticipation of such a shift in Europe and Japan could atleast drive a pause in the US dollar’s ascent, and view the US dollar effect on the gold price to be neutral for the rest of 2022.
Geopolitical Risk (Positive): The gold price saw upwards of a US$150/oz premium from surging geopolitical risk after Russia’s invasion of Ukraine. While the gold price pulled back from its rise in March 2022 after the invasion, this was mainly driven by the offsetting factor of the Fed’s rate hikes, and we believe that this geopolitical risk premium is still baked into the gold price. While the current level of conflict is no longer a shock to the market and has been priced in, there remains a potential forit to worsen or lead to a broader contagion affecting more countries, driving an additional geopolitical risk premium into the gold price.
General Risk (Positive): Beyond just the specific risk of the Russia-Ukraine conflict, risk in a broader sense also appears to be increasing globally, both geopolitically and economically, and gold tends to see a premium in such situations in its role as an overall risk hedge. Currently we are facing the risks of geopolitical tensions well beyond Ukraine, excessive inflation, surging interest rates, an already ongoing equity market crash, housing and other asset bubbles, and the possibility of a global economic slowdown. This is a lot to hedge against, and investors may be happy to hold gold to do so. The major rise in the US dollar index, a measure of the US dollar versus a basket of currencies, from 89.4 in January 2021 to 105.5 in January 2022, has therefore put downward pressure on the gold price (Figure4). This ramp up in the US$ has been driven by Fed hiking rates higher and faster than those in other major regions, drawing in capital inflows to chase these higher yields, pushing up demand for the US$.
Expecting gold to remain within current trading range in 2022
For comparison, in gold’s bear market from 2013-2018,there was virtually no inflation and certainly not anywhere near the level of broad economic and political risk that we see today. This could explain much of gold’s relative recent strength, even as some fundamental monetary factors would seem to indicate that it should be declining more than it is. Overall, we see a balance of factors, with potential downward pressure on gold from the money supply and real yields, a neutral effect from the US$ and upside support from specific geopolitical and overall general risks. This could see gold to continue to average somewhere around the US$1,850 level for the rest of 2022, as it has for the past two years, barring a dramatic shift in the balance of these factors in the second half.
Gold-backed crypto gains significant market share in correction
The relatively steady gold price has supported gold-linked crypto assets during the ongoing correction of the sector. This has seen them make substantial gains in their share of crypto market cap as manymajor coins have declined substantially and several have entirely collapsed. Even prior to the current downturn, the combined market cap of gold-linked coins Pax Gold and Tether Gold had already been on a strong uptrend, rising sevenfold from a combined 0.005% of the total sector market cap in November2021 to 037% as of early May 2022 (Figure 5).
This market share surged another 3x by mid-May 2022 to11.6% as the crypto correction took hold, and after a brief pullback, has reached 0.182% currently. This is even as the absolute market cap of the two coins has remained relatively stable, at an average of US$1.1bn from March 2022to the present. In contrast to several ostensible ‘stable’ coins which have collapsed in the crash, and many of the largest crypto assets which have declined significantly, Pax Gold and Tether have both held their value.
PAX Gold and Tether Gold now as large as some major gold ETFs
The market caps of Pax Gold and Tether Gold have increased as more additional units, which are fully backed by new gold holdings, are created, to meet what we expect to be rising demand for this product, which is also likely to drive the creation of additional gold-linked crypto assets. Both major gold-linked crypto assets have already become major players for investment in the gold space. Pax Gold’s market cap at US$616mn and Tether Gold’s market cap of US$455mn puts them in a range with major gold ETFs like the VanEckMerk Gold Trust with a net asset value of US$653mn and the Goldman Sachs Physical Gold ETF with a net asset value of US$557mn (Figure 6).
There are several factors that influence the value of gold. It can be challenging to grasp at first but once you get the hang of it, it’s extremely simple. Throughout this article, there is information on the five key factors thatinfluence gold, and the relationship between gold and crypto-currencies. Nowthat you have the base information of the gold market today, it will be easier to start your investment journey.