160107 precious metals weekly

Precious Metals Weekly

Group Economics Macro & Financial Markets Research

07 January 2016

Gold no longer a safe haven?

Georgette Boele Co-ordinator FX & Precious Metals Strategy

• Gold behaved like a safe haven before November 2003…

• …but the gold has evolved from being a safe-haven asset to a speculative asset

Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com

Introduction Gold is often referred to as a safe haven asset. Such an asset is in high demand in times of high uncertainty because it is seen as a relatively safe store of value. Indeed, gold prices have rallied this week as investor sentiment deteriorated on China. In this note we argue that gold used to be a safe haven asset but this is no longer the case1.

Gold behaved like a safe haven before November 2003…

Before the introduction of gold exchange traded funds in 2003, gold behaved as a safe haven asset. In periods of risk aversion where safe haven assets are favoured, equities tend to fall, equity volatility tends to rise and 10y US Treasury yields tend to fall. Before November 2003 gold prices in general moved in tandem with equity volatility while to rose when equities sold off and US Treasury yields moved lower.

Gold retail demand as % of total demand September 2015 in %

Jewellery fabrication Industrial fabrication Retail investment Net official sector

Source: GFMS Thomson Reuters

…but the gold has evolved from being a safe-haven asset to a speculative asset In November 2003 gold exchange traded funds were introduced. With this introduction, investors have been facilitated in taking speculative positions in the gold market. A few

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The following analysis is based on our econometric model of the gold price

Insights.abnamro.nl/en

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Precious Metals Weekly - Gold no longer a safe haven? - 07 January 2016

years earlier futures on gold were already introduced but the introduction of gold ETFs have opened the market to the wider public. Investors invest in speculative asset based on their expectations of future returns (in the form of expected price appreciation or income such as coupons or dividends). The introduction of ETFs has resulted in a sharp increase of retail investment into gold. Whereas in March 2000 retail investment accounted for 1.4%of quarterly gold demand, in September 2015 it accounted for 27% (see graph above).

Did the above mentioned relationships change? In one word yes. The relationship with the US dollar has become strongly negative. Currently, the US dollar is the most dominant force driving gold prices. More surprisingly since 2003 the relationship between equity volatility and gold prices has changed sign meaning that a lower VIX (improved investor risk appetite) has coincided with higher gold prices and vice versa. Another interesting development is that the relationship between changes in gold prices and 10y US Treasury yield has also become negative. So periods with lower 10y US Treasury yields coincided with periods of higher gold prices and vice versa. All this means that gold prices no longer have safe haven characteristics. Even though in general this may be the case, there are periods that investors buy gold because investor sentiment deteriorated as seen this week. However, our research suggests that this is an exception to the rule.

ETF positions and the gold price Total ETF gold positions

Gold price

100

2,200

80

1,800

60

1,400

40

1,000

20

600

0

200 04 05 06 07 08 09 10 11 12 13 14 15 16 Total ETF positions gold (lhs)

Gold price (rhs)

Source: Bloomberg, ABN AMRO Group Economics

ABN AMRO precious metals forecasts Changes in red/bold

End period Gold Silver Platinum Palladium Average Gold Silver Platinum Palladium

05-Jan Close 14 1,185 1,081 15.7 14.0 1,216 894 798 545 Q1 15 1,218 16.7 1,194 786

Q2 15 1,193 16.4 1,129 759

Source: ABN AMRO Group Economics

Mar-15 Jun-15 1,184 1,172 16.6 15.7 1,141 1,081 736 674 Q3 15 1,126 15.0 993 618

Q4 15 1,104 14.8 908 606

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 1,112 1,061 975 950 925 900 900 950 975 1,000 14.5 13.9 13.5 14.0 14.5 15.0 15.5 16.0 17.0 18.0 910 894 775 800 850 900 950 1,000 1,050 1,100 652 562 500 525 550 600 625 650 675 700 2015 Q1 16 Q2 16 Q3 16 1,160 1,018 963 938 15.7 13.7 13.8 14.3 1,055 834 788 825 691 531 513 538

Q4 16 913 14.8 875 575

2016 958 14.1 830 539

Q1 17 900 15.3 925 613

Q2 17 925 15.8 975 638

Q3 17 963 16.5 1,025 663

Q4 17 988 17.5 1,075 688

2017 944 16.3 1,000 650

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Precious Metals Weekly - Gold no longer a safe haven? - 07 January 2016

Find out more about Group Economics at: https://insights.abnamro.nl/en/

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