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Gold $ 3,000? | CFA Institute Enterprise Investor


Gold is probably the world’s oldest treasure trove that is still widely used. Yet it is impossible to determine its internal value. Why? Since gold does not generate any income, it has no cash flow for discounts. In this case, it is similar to sovereign debt in developed countries today. And just as gold was used to make money in earlier times, sovereign debt still serves the same purpose today.

The price of gold (XAU) and the US dollar index (DXY) have a negative relationship while the price of gold and money supply (M2 / GDP) is a positive. This is true from 2000 to 2020 and reflects how the US dollar and gold acted as the central bank’s official reserves and how gold was valued in US dollars in the Bretton Woods method.

When U.S. monetary policy relaxes and risk-free dollar assets return, DXY also declines as M2 / GDP rises, leading to an increase in XAU. The ongoing rally in gold prices is consistent with the rapid increase in US money supply after the resumption of quantitative easing (QI) in response to the Covid-1 shock shock. But the negative correlation between XAU and DXY seems to have all disappeared.

Why did this happen and what else could there be for gold? Before answering this, we need to better understand the historical context.


Gold price (XAU) and dollar index (DXY)


Gold prices (XAU) and US money stocks (M2 / GDP)


Decade-Long Gold Bull Run, 2000–2011

After the dot-com bubble, the price of gold reached its peak and then the 11-year rally began. On a high-frequency basis, gold prices rose with the geopolitical crisis, jumping more than 5% on 11 September 2001 and 5% on 24 June 2016, the day after the Brexit referendum.

Such events could have long-term effects on the price of gold. In response to the 2001 terrorist attacks, for example, the United States went to war in Afghanistan and Iraq. And on top of the massive trade deficit, from budget surpluses to revenue deficits. This provoked a long-term US dollar bear market that only ended when the global financial crisis (GFC) stalled the financial system.

The GFC represented the mother of all liquidity crises and the banks wanted the much-needed dollars. In just a few months, the euro vs. the dollar peaked and then it started the biggest drawdown in its history. Margin calls had to be met and the price of gold fell amid a frenzy of forced sales.

But then the US Federal Reserve took steps to stabilize the market, providing unprecedented dollar liquidity through QE. Forced sales stopped and gold prices rose again. The European debt crisis finally put an end to the decade-long bull race of the metal.



Gold Downward Correction Episode, 2011-2015

In the early days of the European debt crisis, concerns over possible euro crack-ups and negotiations on the US debt ceiling have boosted gold demand. XAU exited DXY in September 2011 and began a protracted upswing. With Greece on the brink of default and the euro facing future risks, some liquidity-conscious European banks may have sold their gold reserves in exchange for dollars.

Meanwhile, the US economy is on the path to full employment. Which increases the demand for valuable U.S. assets. After the oil accident of 201 oil, DXY rose again and the price of gold fell. When Europe finally came to the rescue of Greece in 2015, liquidity concerns eased, DXY reached a plateau and gold prices began to recover.

Second Bull Run, 2015-2020

Since coming down at the end of 2015, the price of gold has been rising, which has no end. As Europe progresses toward more and more financial unions, as we have predicted, and the United States struggles with its response to the Covid-1 pandemic epidemic and social and political instability, DXY has declined slightly. This is despite the accelerated U.S. financial expansion in response to the epidemic. Since there is no negative relationship between gold and money supply, the current gold assembly is different.

But what does this mean? In our view, the European Central Bank’s (ECB) embrace of QE has distorted the negative relationship between XAU and DXY. This has boosted both gold and the dollar: EUR / USD has traded broadly close to the 1.10 level in the last five years compared to 1.20-1.50 in the previous five years. In 2015, the ECB moved from a conservative monetary policy to an oolo, more Fed-like approach based on the German Bundesbank traditions.

As the two largest central banks printed so much money to deal with the Covid-1 crisis, the dollar and the euro should have lost value against gold. But the gold rush – and the higher discomfort among investors that it represents – precedes the epidemic. After all, gold and DXY jumped dramatically after the Brexit referendum on fears of a breakdown in global political and financial order after World War II.

The continued rise of populist movements around the world legitimizes this fear and could signal a reversal. In many cases globalization seems to be moving in the opposite direction. Already shrinking geopolitical and financial structures are under further pressure from the epidemic, which could be a problem ahead if gold prices rise.

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Where do we stay from here?

The inverse relationship between gold and the dollar Should Hold fast in the long run. For example, the real and potential liquidity crisis (GFC) has led banks and investors to convert metals into cash, leading to lower gold prices. But then the central banks enter and flood the system with liquidity and price recovery.

A similar process is working with the epidemic. As the ECB and the Fed entered the economy, the DXY was relatively flat until recently. (There has been a significant decline since we conducted this analysis). So no matter what happens, the dollar will move forward based on the relative strength and policy framework of the European and US economies. At such times when monetary and monetary policy is never flexible, gold can climb to new heights.

Three scenes

So what does this mean for the price of gold? To find out, we applied common economics to estimate a quarterly “error-correction” model for the basic functions of the gold price: DXY and M2 / GDP in the United States.

The long-term equation, which is estimated from the first quarter of 111 to the first quarter of 2020 and constitutes 1,160 observations, is presented below. Following the Convention, we have reduced the price of gold by CPI; T-figures are parentheses.

Gold price forecasting formula

The unspoken residue is the degree of extra- or undershooting. The coefficient can be interpreted as elasticity as all variables are converted to logs. Thus, according to these estimates, the effect of 1% DXY growth on XAU / CPI is equal to -0.67% and 1% increase in the money stock ratio to GDP is equal to 2.77%.

There are several things to keep in mind before using this model for forecasting purposes. Since the correlation is equal to 72%, the model does not explain more than 25% of the change in the value of gold (deflated). This is partly because the underlying dynamic effects of the evolution of asset prices are eliminated: for example, a “speed” effect, when the price of gold goes up because it has gone that way in the past; Or an “error correction” effect, when the price moves because it adds or subtracts to the basics. To remedy this, a short-term equation can be added to the model so that the price change has its own one-quarter-lag, momentum effect, and one-fourth of the long-term equation lagging unspoken residue, “error correction process,” or long-term above ECM. Remaining behind in the equationT-1:

The second gold price formula

From this model, we have created three scenarios for the price of gold in the last quarter of 2021 based on the assumptions of the fundamentals. Although the model has predicted deflated The price of gold, we can guess the underlying Nominal Pricing through a projection for CPI, which we expect to increase by 2% annually.


Three views for the price of gold


1. No fundamental change

This scenario assumes that M2 / GDP and DXY remain at their last observed quarterly levels. So the price of gold will rise slightly to ~ 1,900 and will stabilize there in 2021. This is probably a less likely outcome if the QE-fuel currency continues to rise as expected.

2. Continued financial expansion

Money-to-GDP ratios typically increased by about 1 percentage point per quarter in 2019 and early 2020. If this trend continues until 2021, leaving everything else unchanged, gold could reach 2, 2,400 by the end of 2021. Perhaps the scenario and indeed can be relatively conservative. If anything, money creation will only accelerate.

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3. A weak dollar

DXY has been somewhat stronger since the early 1990s. Recently, the euro weakened against the dollar as the ECB reintroduced QE in response to the epidemic. But depending on how the epidemic works, DXY’s ward upward trend could be reversed. In the fourth quarter of 2021, it may reach its 2008 low. Our calculations, which consistently estimate QE, suggest that a price of $ 3,000 per ounce is possible.

After all, it forms a bright outlook for the price of gold. We rarely see a path to negative risk and expect gold to fall between $ 1,900 and 3,000 3,000 bandwidth over the next 18 months.

Which means one of the world’s oldest values ​​could save more in the months ahead.

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The opinions, opinions and assumptions expressed in this research paper are merely the opinions of the authors and do not reflect the official policies or opinions of JLP, its affiliates or affiliates.

All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Photo Credit: © Getty Images / Bloomberg Creative

Yvo Timmermans, CFA

Yvo Timmermans, CFA, is the portfolio manager of JLP Asset Management, a global real estate securities firm, and has a wide range of 14 years of investment experience in a wide and emerging market. He is currently based in Amsterdam and oversees JLP’s investments in EMEA and Latham. Timmermans graduated from Maastricht University with a master’s degree in economics and international management and recently completed an executive degree in global macroeconomic challenges from the London School of Economics. Timmermans is a CFA charterholder.

Paul van den Nord

Paul van den Nord is an affiliated member of the Amsterdam School of Economics (University of Amsterdam) and the Amsterdam Center for European Studies (ACES). He spent most of his career at the OECD in Paris, most recently as a consultant to chief economists and as an economic adviser to the European Commission in Brussels during the 200-20-201 period. In the years 2013-2017, Van den Nord worked for a financial institution in London and Geneva and later returned to the academy. He has published extensively on financial unions and the political economy of reform, including numerous articles in academic journals.



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