Macro Factors Gold Report - Q3 2020 - Invesco
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Macro Factors Gold Report Q3 2020 This report is for professional investors/qualified investors/qualified clients. Please do not redistribute.
Please keep an eye out for future reports,
including a look into how gold performed based
on previous US elections, and a review of supply
and demand trends observed in the quarter.
This is the second of our four-part series on gold. In this part
of our Q3 Gold Report, we look at some of the key macro
Introduction factors that help frame the gold price performance that
we reviewed in the first part of the series.
Macro Factors
Gold price and real bond yields
Gold 10-year TIPS yield (righthand scales, inverted)
All-time high of
2200
2000
-1.5
-1.0
$2,064 an ounce
1800 -0.5
1600 0
USD per Fine Troy ounce
1400 0.5
Yield (%, inverted)
1200 1.0
1000 1.5
800 2.0
600 2.5
400 3.0
200 3.5
2007 2009 2013 2015 2017 2019
Data: Bloomberg, to 30 September 2020. Past performance is not an indicator of future returns.
Since gold is a non-yielding asset, its price tends to be particularly inflation target and broader monetary policy objectives. The Federal
sensitive to changes in the income available from competing Open Market Committee said it expected to keep interest rates at
perceived “safe havens” such as US Treasuries. Lower bond yields, zero until at least the end of 2023, even if inflation rose beyond
especially when adjusted for inflation, reduce the opportunity cost its 2% target. That would generally be positive sentiment for gold,
for holding gold. which earlier in the month recorded an all-time high of $2,064 an
ounce. Towards the end of the quarter, as markets began to question
In the third quarter, real bond yields hit a record low (-1.1% at the whether the statements actually signalled any meaningful shift,
end of August), as concerns grew over the strength of the economic real yields moved off their lows, pushing the gold price lower.
recovery in the US and after the Federal Reserve changed its
Gold Report 03
Macro Factors
Gold price and negative-yielding debt
Gold Stock of negative-yielding debt (righthand scale)
2200 18
16
2000
14
USD per Fine Troy ounce
1800 12
USD, trillions
10
1600
8
1400 6
4
1200
2
1000 0
2014 2015 2016 2017 2018 2019 2020
Data: Bloomberg, to 30 September 2020. Past performance is not an indicator of future returns.
In terms of the bond market more generally, the stock of negative-yielding debt went back
up above $15 trillion during the quarter, as the German Bund curve ended September with
all maturities (out to 30 years) yielding below zero. Central bank purchases and the weaker
economic backdrop have kept yields compressed, especially in Europe where the short
end is anchored to the ECB’s negative policy rate. We have also seen increased issuance
with governments needing to fund their pandemic responses and, as with corporates,
take advantage of the lower-rate environment to refinance their debt profiles.
Gold Report 04Macro Factors
Gold price and US interest rates
Gold Fed Funds Rate (righthand scale, inverted)
2200 0.0
0.5
2000
1.0
1800
1.5
USD per Fine Troy ounce
Upper bound (%, inverted)
1600
2.0
1400 2.5
3.0
1200
3.5
1000
4.0
800
4.5
600 5.0
2007 2009 2011 2013 2015 2017 2019
Data: Bloomberg, to 30 September 2020. Past performance is not an indicator of future returns.
Although the Fed Funds rate remained unchanged in the quarter, the Fed announced it was
changing its longer-term goals to “a flexible form of average inflation targeting”. With inflation
having struggled to consistently hit its previous target of 2%, as measured by the Personal
Consumption Expenditures (PCE) Index, the Fed is expected to let inflation run above 2% for
some time. With the current Fed median forecast not seeing PCE inflation back at 2% before
the end of 2023, rates are expected to remain unchanged at 0.25% for the foreseeable future.
Gold Report 05Macro Factors
Gold price and inflation expectations
Gold US 10yr breakeven (righthand scale) US 5y5y inflation swap (righthand scale)
2200 3.5
2000 3.0
USD per Fine Troy ounce
1800 2.5
1600 2.0
%
1400 1.5
1200 1.0
1000 0.5
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Data: Bloomberg, to 30 September 2020. Past performance is not an indicator of future returns.
While the change in the Fed’s stance on managing inflation may not have done much to shift
the market’s view, the speculation of additional fiscal stimulus from the US Government had
more of an effect. Into the end of September, doubt grew over whether a bi-partisan stimulus
package could be agreed, and inflation expectations slipped back. Inflation expectations have
been a key driver of the gold price of late, as reflected in this chart.
Gold Report 06Macro Factors
Gold price and the US Dollar
Gold US Dollar Index (righthand scale, inverted)
USD weaker in Q3 by
2200 83
-3.6%
2000 88
USD per Fine Troy ounce
1800
Index level (inverted)
93
1600
1400
98
1200
1000 103
2015 2016 2017 2018 2019 2020
Data: Bloomberg, to 30 September 2020. Past performance is not an indicator of future returns.
Gold is an asset almost universally priced in USD, making the relative value of the greenback
significant in determining its value in foreign currency terms. During the third quarter, the USD
declined further (-3.6%), although recovered somewhat from its near-term low at the end of
August. The chart shows a clear relationship with the gold price: the gold price strengthened
as the USD weakened and then declined as the USD rebounded through September.
Gold Report 07Macro Factors
Gold price and economic risks
Gold Global Economic Policy Uncertainty Index (righthand scale)
2200 450
2000 400
300
1800
USD per Fine Troy ounce
350
1600
Index level
250
1400
200
1200
150
1000
100
800 50
600 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Data: Bloomberg, to 30 September 2020. Past performance is not an indicator of future returns.
Although economic risk reduced through the quarter, it still remains heightened in a longer-
term context. The Global Economic Policy Uncertainty Index is a GDP-weighted measure
of the frequency of national newspaper articles referencing the economy, uncertainty and
policy-related matters. Obviously, the Index has been acutely impacted by the pandemic and
will continue to be so. Energy prices, geopolitics and other macro factors will also feed into
the level of uncertainty, as will political events leading up to and most likely beyond the US
Presidential election.
Please look out for the third part of our series, in which we will review gold’s performance
during previous elections.
Gold Report 08Investment risks In Israel, this document may not be
Past performance is not a guide to reproduced or used for any other
future returns. The value of investments purpose, nor be furnished to any other
and any income will fluctuate (this may person other than those to whom copies
partly be the result of exchange rate have been sent. Nothing in this document
fluctuations) and investors may not should be considered investment
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greater risk of large fluctuations in the
value of the instrument. Investors are encouraged to seek
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Data as at 30 September 2020, professionals and are subject to change
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