Gold Finds Firmer Footing
We remain constructive on gold as a portfolio risk diversifier
Chief Investment Office17 Nov 2022
  • Lower-than-expected inflation drives market euphoria; gold gains +8.9% from recent lows
  • Demand tailwinds – central bank buying reaches >300% increase on a y/y basis
  • Positive real rates, however, will form significant headwinds for gold from a return perspective
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Gold rallies on slowing CPI data. The past week (ended 11 November) was a significant milestone for bullion as it recorded its best weekly performance (+5.3%) since March 2020, and an impressive +8.9% gain from recent lows in November. This rally was driven primarily by cooler-than-expected US CPI data for the month of November (actual: +0.4% m/m, consensus: +0.6%; actual: +7.7% y/y, consensus: +7.9%), which raised hopes of slower rate hikes moving forward and provided a brief respite from dollar strength (the DXY index ceded 4.1% for the week). This puts gold’s YTD performance at -3.0% and firmly establishes it as one of the top-performing asset classes for the year thus far.

A victim of positive real rates. Notwithstanding the strong relative performance of gold this year, there are undeniable headwinds facing bullion, chief among which are positive real rates. As can be seen in Figure 2, the 1Y real interest rate has nudged its way into positive territory since June 2020 while the 10Y real interest rate sits almost at 2.0%. This has a significant impact on the attractiveness of gold since the latter is a non-interest-bearing asset. As we wade deeper into a new regime of higher interest rates and inflation rolls over, this dichotomy between interest-bearing and static assets will become increasingly important in determining how investors allocate their capital.

Glimmer(s) of hope. Positive real rates and dollar headwinds are big challenges for gold, but there are some bright spots for its nearer term outlook. While the timing of a Fed pivot remains uncertain, there are indications that the pace of rate hikes may slow. This should weaken the dollar and provide some reprieve for gold, which is often seen as an alternative currency to the greenback. Geopolitical uncertainty is another potential tailwind for the safe haven asset; political turmoil in the UK (which saw multiple key appointment holder changes), continued ambiguity surrounding China’s zero-Covid policy, and the persistence of conflict in Eastern Europe, could all potentially provide a short-term catalyst for gold. Central bank buying has also kept gold prices buoyant – global purchases in 3Q amounted to almost 400 tonnes, the single largest quarter of demand from this sector since 2000 and more than a 300% increase on a y/y basis.


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Note: All views expressed are current as at the stated date of publication


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