When entering the site and if cookies are prevented from being saved, a message must be displayed
in a popup message box informing the user that their local browser settings are preventing
cookies from being saved and that cookies are required for the site to work. Exact text
to be provided for UAT. On OK click of the message, the user should be redirected to
the global landing page (currently ssga.com).
The shifting investment landscape driven by low interest rates have diminished the opportunity costs of gold.
On a relative basis, gold may look attractive in an environment of negative yielding debt and elevated equities valuations.
Lower return expectations of traditional fixed income and equity solutions may see gold take on a more prominent role in portfolios.
This post was written with contributions from the SPDR Gold Strategy Team: Maxwell Gold, CFA (Head of Gold Strategy), Diego Andrade (Senior Gold Strategist), Robin Tsui (APAC Gold Strategist).
With the gold price up 18% year to date,1 there’s no shortage of headlines earmarking its positive performance to geopolitics, the Federal Reserve (Fed), or growing recessionary fears—to name just a few catalysts floated. In actuality, there is a confluence of short-term and long-term macroeconomic drivers working together that influence gold’s fundamentals (both cyclical and counter-cyclical sectors) which in turn impact the gold price (see Chart 1).
Sinking Global Interest Rates Help Push Gold’s Opportunity Costs Lower
While gold’s performance is the result of interactions between all of the above strategic and tactical drivers, gold’s recent rally has seen solid support from falling interest rates over the course of 2019. In fact, lower real rates are significantly changing the opportunity cost picture for gold investors, particularly as competing assets like bonds provide lower yields and returns for investors seeking shelter from growing macroeconomic uncertainty.
Heading into 2019, market implied US real interest rates were hovering around 1.0%,3 and both the Fed and European Central Bank (ECB) were projecting multiple interest rate hikes coupled with reductions of their balance sheets. But lower global growth expectations, a prolonged trade dispute between the US and China, and an inversion of the yield curve have shifted the positive interest rate trajectory 180 degrees. Since the start of this year, real interest rates have collapsed (dipping below zero in Q3 2019), with the Fed and ECB changing course back to accommodative monetary policies.
The Bond Market Conundrum Helps Gold Shine in 2019
Against this interest rate backdrop, defensive positioning by investors is on the rise, which is supporting gold’s upward price movement in several ways (see Chart 2 and Chart 4). As global uncertainty has risen, investors have responded according to conventional wisdom, turning to fixed income markets for both safety and stability. But with continued low rates, the traditional playbook may not best serve investor objectives going forward. From this perspective, gold’s rally may continue to find support from the attractive relative valuations and improvement in opportunity cost associated with gold.
As investor demand for bonds has risen, it has helped bid up bond prices, putting further pressure on yields. Globally, negative yielding debt has climbed from $7 trillion to $13.4 trillion over the last 12 months,4 while gold sentiment has also risen (see Chart 2). This quick growth in negative yielding debt has created an attractive carry for gold, despite it not offering a yield in the traditional sense. On a relative basis and in face of continued negative rates—both real and nominal—gold’s opportunity cost is rapidly converting into an “opportunity benefit.”
Unprecedented Times Drive New Investor Strategies
With elevated bond valuations, investors are quickly adjusting their forward-looking return expectation for bonds. Furthermore, high valuations, rising deficits, and unprecedented monetary intervention by global central banks over the last decade have increased the risks to many segments of the bond market. Much like bonds, gold has historically demonstrated the potential to serve as an effective diversifier and a store of value, especially during turbulent markets. Given the high current cost of bonds, many investors and speculators have shifted to a more positive outlook for gold, which may provide a more beneficial complement to bond allocations in the lower rate environment.
A similar dynamic is also at play in equity and currency markets, where relative high valuations are making gold an attractive option. Currently, the price to earnings (P/E) ratio for both US and global equities, while not in bubble territory, remain stretched compared to the average level over the last 10 years (see Chart 3).
Source: Bloomberg Financial L.P., State Street Global Advisors. Data from October 31, 2009 to October 31, 2019.
Since the market bottom on March 9, 2009, US and global equities have risen 17.5% and 13.5%, respectively, while gold has seen a 4.6% annual return over the same period.5 Based on current elevated valuations, weakening currencies, and a decade-long rally in the US equity market, gold appears attractive on a relative valuation basis, as well as a cheap hedge against a potential rise in market volatility. Additionally, gold price in other global currencies, including the British pound, Japanese yen, Canadian dollar, and Australian dollar, have reached all-time highs in local terms this year,6 another reflection of currency devaluation concerns lowering the opportunity costs of investing in gold.
Still More Room to Run For Gold Investors
Defensive positioning in conjunction with attractive relative valuations to bonds, equities, and currencies are mobilizing investors to gold. In September, holdings in global gold backed exchange trade funds (ETFs) hit an all-time high of 2855 metric tons of gold, exceeding the previous high in 2012.7
From a mean reversion perspective, gold ETF holdings reaching a new high may appear to some as a potential headwind for gold’s outlook. However, with gold’s price still more than 20% below its all-time high of US $1900/oz, this may actually provide a tailwind. Investors shifting allocations back to into gold (from an underweight position) are doing so at a lower average price compared to the run up in gold ETF assets and price between 2010–2012. As a result, investors may need to continue to increase gold holdings to match the commensurate appreciation of equities and fixed income in portfolios over the last decade. Based on this view, flows into gold ETFs may continue to rise and gold’s rally may continue to find support from its current attractive valuation and diminishing opportunity costs.
The opportunity costs of holding gold are rapidly transforming into benefits. As bond yields get pressed lower and investors look to other, less traditional assets to navigate volatility and lower return expectations of their “go-to” traditional fixed income and equity solutions, gold may play a more prominent role in portfolios.
1 Bloomberg, State Street Global Advisors, asof October 31, 2019. Based on gold spot price (US$/ounce).
2 Assets may be considered “safe havens” based on investor perception that an asset’s value will hold steady or climb even as the value of other investments drops during times of economic stress. Perceived safe haven assets are not guaranteed to maintain value at any time.
3 Bloomberg L.P., State Street Global Advisors. Based on US 10-Year TIPS Implied Yield as of 12/31/18.
4 Bloomberg Finance L.P.,State street Global Advisors, October 31, 2019.
5 Bloomberg L.P., data from March 9, 2009 to October 31, 2019. US Equities = S&P 500 Total Return Index, Global Equities = MSCI ACWI Total Return Index, Gold = gold spot price.
6 Bloomberg L.P., as of October 31, 2019. Spot prices of gold in GBP, JPY, CAD, AUD terms evaluated.
7 World Gold Council, as of September 30, 2019.
This material is for informational purposes only and does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
Investing in commodities entails significant risk and is not appropriate for all investors.
Commodity funds may be subject to greater volatility than investments in traditional securities. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors, such as weather, disease, embargoes, and international economic and political developments.
There are risks associated with investing in Real Assets and the Real Assets sector, including real estate, precious metals and natural resources. Investments can be significantly affected by events relating to these industries.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
THIS SITE IS INTENDED FOR QUALIFIED INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States or as otherwise qualified and permissible under local law. The information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-866-787-2257, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Not FDIC Insured * No Bank Guarantee * May Lose Value