Gold Outperforms Stocks In Q1, 2018

Gold’s finish for the quarter was its lowest quarterly rise seven years but price-supporting factors present a bullish environment going forward. In the final week of the quarter gold traders were the most bullish they’ve been since January 26, according to the weekly Bloomberg survey, whilst Goldman Sachs turned bullish on gold for this first time in five years, suggesting they too see gold’s upside potential ahead.

ETF holdings reached 2,268.6 metric tons in March’s penultimate week, the highest since 2013. Holdings have increased in eight of the nine previous quarters, climbing by 43 tons in the first quarter this year.

The safe haven qualities of gold have brought it firmly back into the spotlight this year. Trump’s sabre-rattling and trade wars have done little to quell concerns that the global geopolitical and economic situation will return to a steady keel. Recent appointments to the White House – namely John Bolton and Mike Pompeo – have furthered exacerbated worries regarding the US President’s ‘America First’ strategy.

The administration is also favourable of a weak dollar, which suggests that little is likely to change when it comes to the currency’s recent performance. Whilst it has ticked up recently it has not been able to break it’s longer-term downtrend. Bloomberg Intelligence’s Mike McGlone said in a recent note that the gold price may soar to $1,400 per ounce should the downtrend not reverse and the US dollar remain weak.

The currency is also falling out of fashion. There is an ongoing shift out of the global reserve currency, not to mention the global equities fall for the first quarter in two years.

3 Month Relative Performance

- Click to enlarge

Gold remains unfazed by monetary policy 

Five years ago the gold price plunged as market commentators and funds became spooked over rumours of QE tapering. The Federal Reserve’s hikes have proven that easy monetary policy went so far that gold is an increasingly attractive option as both a safe haven and store of value.

Goldman Sachs analysts last week indicated that interest rates were one area of concern and would support gold prices, “Based on empirical data for the past six tightening cycles, gold has outperformed post rate hikes four times…Our commodities team believes that the dislocation between the gold prices and U.S. rates is here to stay.”

In times past one would understandably expect the gold price to react negatively to an uptick in interest rates, because the opportunity cost of holding it rather than bonds or cash increases.

But, six rises from the FOMC since 2015 have done little to break gold’s run. This is thanks to inflation which has impacted the cost of living so much that real interest rates have actually decreased between 2015 and the end of 2017. So, this could explain why the gold price has climbed.

More interestingly, however is that since the end of 2017 real interest rates in the open market have been rising and so too has the price of gold. In both Q4 2017 and now Q1 2018 the gold price has climbed, as have inflation-adjusted 5-year bond yields.  This is something that has not been seen since the gold price hit it’s all time high of nearly $2,000/oz. Perhaps another sign that the great global economic recovery we all keep hearing about is not quite as present as politicians would like us to believe.

Markets are also struggling to reconcile the disparities between the Fed’s and other central banks’ monetary policies. The FOMC is clearly in the latter stages of its rate-hike plans, yet other monetary policy committees are yet to make significant changes. This shows that the global financial system is not yet back on equal footing and we are likely to see more diversions across economies and markets.

Gold Spot, Q1 2011 - 2018

- Click to enlarge