I rarely say this, and even now, only reluctantly so, but you can hardly blame anyone who’s excited about gold right now.
It was a mere two weeks ago when investors who had RSVP’d for Donald Trump’s “tremendous” Iran fight were busy dumping gold and the yen, after the mercurial US president decided to call off World War III, prompting a swift recovery for equities and other risk assets, which briefly swooned in the days after the US assassinated Qassem Soleimani.
After flirting with the most overbought levels in years, gold fell back into more reasonable territory, and the yen retreated, as the threat of a global military conflagration fell away like so many other purportedly imminent conflicts.
Oh, what a difference a couple of weeks makes.
Thanks to the ongoing threat of a serious pandemic and the concurrent collapse in bond yields, gold is resurgent. In January, prices gained some 5%, marking a strong start to the new year on the heels of 2019’s blockbuster performance.
As noted just five days ago, January’s massive bond rally at one point increased the global stock of negative-yielding debt by a whopping $1.2 trillion over the space of a single week. Obviously, the lower yields go, the lower the opportunity cost for holding gold. In addition, the growth scare occasioned by the Wuhan outbreak has raised the odds of more accommodation from central banks, which just adds to the list of bullish catalysts for bullion.
5-year real yields in the US are now parked down near -20bps. It’s thus no surprise that gold is making another run at $1,600.
Notably, we’re on the verge of hitting a new record when it comes to the total global hoard of gold in ETFs.
Bloomberg data shows ETF gold holdings rose above 2,560 tons this week. That’s the highest going back six years. Another blip higher and we’ll hit the record from December 2012.
If you think that presages an imminent pullback, you may be right. But you may be wrong, too. Because, as it turns out, that’s (far) too simplistic a picture.
“This does not mean that retail investors are as overweight gold as they were in 2012. Far from it”, JPMorgan wrote last week, in an expansive take. Consider the following excerpt from the same piece:
The value of another assets held by retail investors such as equity and bond funds has risen by so much since 2012 that the share of gold holdings has fallen to well below the 2012 peaks. This is shown in Figure 3 which shows the ratio of the outstanding amount of gold ETFs in dollar terms divided by the dollar value of equity and bond funds worldwide. This ratio, which can be considered as proxy for the gold allocation of retail investors, stands at rather low levels by historical standards despite the rise over the past year. The current ratio of just below 0.3% is almost half of the historical peak seen in 2012. This ratio rises to 4.5% if we add gold bars and coins to gold ETFs as another form of financial investment into gold, but the picture remains the same, with a current overall gold allocation that is well below the 2011/2012 peak of 7% (Figure 4).
And it’s not just retail. You might recall that one of the many ironies of 2019 was the extent to which central bank demand for gold was robust, while their own dovish policy tilt helped make the fundamental case. They were, accidentally, talking their own book.
“Annualising the first three quarters results in 2019 seeing the strongest central bank buying of gold in recent history”, JPMorgan’s Nikolaos Panigirtzoglou went on to say, in the same note, before writing that although “the strong buying of gold by central banks over the past year in particular has pushed central banks’ average gold allocations at a global level closer to historical averages [this] masks a big divergence between DM and EM central banks with the latter starting from a previously very low level”.
The implication from the figure on the right is that although EM holdings are growing, at 5%, there’s still a lot of catching up to do to get to the 12% allocation for central bank’s globally.
“The biggest [EM] of them, i.e. China, has a gold allocation of only 3%”, Panigirtzoglou reminds you.
Coming full circle, regular readers know we’re not particularly enamored with gold beyond its utility as a portfolio hedge, but in an environment of negative (and still falling) real yields accompanied by a safe-haven bid and dovish central banks, it’s not difficult to make the case.
As sure as night follows day, gold will have a bad week now that we’ve spent 780 words extolling the near-term merits of everyone’s favorite carefully-polished paperweights. But c’est la vie — somehow, we felt like Saturday was a good day to throw the gold fans among you a bone.