About this Episode
Fiona Boal, Global Head of Commodities & Real Assets at S&P Dow Jones Indices, joins The Essential Podcast to discuss the performance of gold through the crisis — looking specifically at gold supply, gold demand, and how "the currency of last resort" has appealed to investors over the past six months.
The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets – macroeconomic trends, the credit cycle, climate risk, energy transition, and global trade – in interviews with subject matter experts from around the world.
Read the research discussed in this episode:
- During the current period of coronavirus-caused geopolitical uncertainty, global commodities markets have experienced unprecedented volatility. Throughout the crisis, while the price of oil plunged and equities benchmarks skyrocketed and tumbled, gold has emerged as a safe haven for investors. Gold's rising market price, massive secondary supply, and expected Q2 success have cemented its shining status as uncertainty prevails. Learn more about gold's silver lining in S&P Global's latest special report.
- Read Fiona's June 8 article on the actions taken by S&P Dow Jones Indices to ensure that commodity indices remain replicable and investable in light of the recent extraordinary market conditions experienced in the oil market.
- "Much has been made of the relative performance of gold since the start of the global COVID-19 pandemic. The S&P GSCI Gold gained 10.2% YTD through April 7, 2020, highlighting its safe-haven status; however, it is worth reviewing this performance and considering what demand drivers may influence gold prices over the coming months," Fiona said in an April 13 article titled "Golden Eye of the Storm."
- With knowledgeable industry contributors, S&P Dow Jones Indices'Indexology Blog delivers more than fundamentals on how indices are conceived, constructed, and used in the marketplace. Indexology features posts, reports, performance, and discussions from thought leaders across S&P DJI as well as guest posts from renowned, subject matter professionals. As a forum for expressing various views and thoughts on indexing, Indexology provides insightful research and a look at market, political, and economic events through the lens of S&P DJI's index data.
Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt. Whenever clouds gather and the economic seas get choppy, investors, look to retreat to safe havens to ride out the storm. And the popular perception is that one safe haven is safer than all others: gold.
Fiona Boal: Gold certainly has had an attractive start to the year from an investor point of view. You could say it's been gold's time to shine.
Nathan Hunt: We are in the midst of a global recession, unprecedented fiscal and monetary stimulus and increasing amounts of sovereign debt have raised concerns about currency devaluation. True to form, gold has rewarded investors by outperforming treasuries and equities, but not perhaps as smoothly and reliably as gold's partisans may have expected. To understand what is happening with gold, I'm joined today by Fiona BoalProduct Manager, Senior Director, Commodity Indices for S&P Dow Jones Indices. Fiona, thank you for joining me on the podcast.
Fiona Boal: Thanks for having me, Nathan.
Nathan Hunt: Fiona, the gold market is a bit unusual. Some market participants seem to have strong feelings about gold's qualities as a safe haven. Why do you think gold inspires these feelings?
Fiona Boal: Gold certainly does evoke emotions possibly more so than any other investible asset. If you think about, we use the term "gold bug," sort of to refer to a person who's extremely bullish on gold as an investment, or as a store of wealth. We really don't have similar names for other investors or who tap different asset classes. I think one of the reasons we think about gold differently is that gold has been considered a store of wealth for thousands of years. It also has a very long history as being used as a currency. In fact, you know, the U.S. abandoned the gold standard in the early Seventies while Switzerland, which was the last country to abandon the gold standard did so in 1999, so in investment terms, that's not that long ago.
Nathan Hunt: How was gold performing in the market before the present crisis?
Fiona Boal: Even before the COVID crisis, gold had been in favor with investors, and that was largely on the back of low, and in some cases negative interest rates, which you mentioned in your introduction, and also a myriad of geopolitical flare-ups. In fact, in 2019 gold was one of the best performing assets. The S&P GSCI Gold posted its best performance since 2010 last year, it was up 18%. And as I said, driven largely by that concept of safe haven asset buying to protect against your political tensions, the protracted trade war between the U.S. And China, and the quantitative easing by the major central banks.
Nathan Hunt: Why is gold believed to be negatively correlated with equities?
Fiona Boal: The generally held belief is that gold is negatively correlated to equities, but usually only during periods of an extended bear market inequities. It can though I've a very short periods of time, actually retreat in unison with equities. But for most investors, gold is considered, as we've talked about, that idea of a risk off investment or a safe haven, and it's usually attractive to investors when they have concerns about the global economy and therefore concerns about equity market valuations.
Nathan Hunt: Under what circumstances might gold retreat in tandem with equities?
Fiona Boal: We actually saw that in March of this year, gold is a highly liquid market and that makes it a very attractive component of an investment portfolio when you need to access cash quickly. You know, whether that might be to meet a liability as a pension fund, to meet a margin call as an investor. And what we saw in March this year is at the start of the market impact from the COVID-19 pandemic, there was that need for investors to access cash. And one of the ways they could do that quickly, easily, and importantly, relatively cheaply, was to take down their gold investments. And that certainly happened. And the other time we can see it is when there are major spikes in volatility. And if you've got an investor who's investing on a risk parity or risk-adjusted return basis, any uptake in volatility will force that investor to take down the size of their position. And we also have seen that over the last couple of months in the gold market.
Nathan Hunt: Tell me a bit about gold's performance through the crisis. Has it lived up to its much-vaunted reputation of being a safe haven?
Fiona Boal: The S&P GSCI Gold's up 14% since the end of last year, and that certainly makes it the best performing component of the Headline S&P GSCI, which is the broad commodity market index. And to put that in perspective within the commodity universe, iron ore is the only other commodity in positive territory so far this year, so gold certainly has had an attractive start to the year from an investor point of view. You could say it's been gold time to shine. You know, these double-digit gains in gold have outpaced equities, but have also outpaced other more safe haven type assets. And I think there's certainly a COVID-19 element to gold's rise. You know, what investors are buying into is a belief that the weak economy, a long-protracted recovery period, will mean low interest rates, might mean heightened volatility, and they've traditionally been very positive attributes for the performance of gold.
Nathan Hunt: Gold is considered to be a supremely liquid asset. Has it functioned that way during the crisis?
Fiona Boal: Certainly. You know, the liquidity offered by the gold market, both gold futures or gold back ETFs has been really invaluable to investors over the last couple of months when they needed to raise cash, and when they needed to meet liabilities quickly. But the market's not been without its challenges. And we had a very unique set of circumstances in March and early April, where we saw a breakdown of the ordinary frictionless gold supply chain. And what that meant was there was a disconnect in the prices between the two major gold markets, which are the New York market and the London market. And essentially that was due to the fact that for some period of time there, it was not possible to ship physical gold bars from London to New York. And at one point we saw the spread between the Comex New York gold futures price, and the London Bullion Exchange price blow out to $70 per troy ounce, which was a massive blowout. Normally, you know, a couple of dollars difference between those prices would be considered significant. Now we've seen that largely correct itself, but it does give you an interesting perspective on how the physical flow of commodities and disruptions can really change the way a market operates if only for a short period of time.
Nathan Hunt: Has the supply of gold been impacted during the crisis? If so, what has caused the disruptions?
Fiona Boal: Yeah, we have, there's certainly been notable disruptions to mine supplies, when you think about the major producing countries, we're talking about Peru and South Africa, for example, and they've certainly had some real problems in terms of COVID-19 outbreaks that have it restricted the mine supply. And we've also seen some bottlenecks in some of the major refining countries, such as Switzerland and Luxembourg, who traditionally have been the ones that have refined most of the gold. So there's certainly been some short-term supply disruptions that you would expect not have an overly large impact on the supply and demand dynamics over the long-term, but certainly in the short term are being felt.
Nathan Hunt: What about demand? Gold is presumably more than just a store of value. How has demand for gold been affected during the crisis?
Fiona Boal: Jewelry demand, which accounts for about 50% of all demand for gold last year has undoubtedly fallen since the start of the year, in fact, according to the World Gold Council in the first quarter of this year, jewelry demand was the lowest they've seen in 10 years. But that compares to investment demand, which is demand for gold bullion or gold ETFs or gold futures, was the highest since the first quarter of 2016. The preliminary data suggests that the second quarter of this year is shaping up to be a continuation of that trend. Certainly with reduced consumer spending on things like non-essential jewelry purchases. But on the other side with combined record flows into gold exchanges and gold futures markets. The other component of demand, that's really interesting is central bank buying. And that demand is much more uncertain. We've got oil-rich nations, which are currently trying to negotiate the impact of a collapsing oil prices, and other global sovereigns looking to fund large stimulus packages to mitigate the impact of the current economic slowdown. And it may be that they choose to either rundown some of their gold reserves or to not add to their gold reserves during this period. The bottom line here is that investor demand is expected to remain very strong. Although from a portfolio construction perspective, there will be a point at which particularly large investors choose not to add further to their gold holdings.
Nathan Hunt: Governments around the world are pumping fiscal and monetary stimulus into the markets in an attempt to stave off a deeper crisis. Does this have any implications for gold?
Fiona Boal: It's certainly been a massive fiscal and monetary response by governments in an attempt to try and lessen that financial impact of the pandemic. And one of the possible outcomes of that is inflationary concerns. And for some investors, they are talking to us about inflation and as an inflation hedge, gold is certainly still viewed by many market participants as what you might refer to as the currency of last resort. Gold, given that it's a non-income generating asset, does tend to perform well in both low interest rate environments, low dollar environments, and during periods of inflation.
Nathan Hunt: Way back in December, you suggested that commodities were being unjustifiably penalized in a low inflation environment. Do you think that has changed for commodities in general and gold in particular?
Fiona Boal: I do think that inflation has returned to the vocabulary of some investors. It's difficult because we've not seen globally a period of sustained inflation for more than 15 years. It would be quite difficult for investors to think about what inflation would mean to their portfolio. But in history, we have seen periods of heightened inflation and extreme economic conditions, which you could argue that we're in now, sometimes can result in extreme inflation. For example, the oil crisis of the 1970s helped push annual price increases, inflation levels above 10%. So I do think that investors are starting to consider the implications of inflation. Although it doesn't appear that they had relatively short-term risks. They're more likely to be something that we would see over an extended period of time.
Nathan Hunt: You recently wrote in reference to the market for gold, "Even when conditions for an asset remained favorable asset prices do not necessarily react positively." Would you consider conditions during the crisis to be favorable to gold? If so, have gold prices reacted as you might expect.
Fiona Boal: I think the performance of gold so far this year definitely suggests that investors believe that the conditions during the crisis have been favorable for gold. I think there is some question around, are there are additional buyers for gold at this period in the economic cycle? There is generally held view in terms of portfolio construction, that there is a maximum level of goal. That one investment I want to hold in a diversified portfolio. So there is an argument to be made that investors are already fully invested in gold, and that might impact the performance of gold going forward. But certainly the very positive performance of gold both last year. And now in the first few months of this year, and during the crisis would suggest that gold has been an incredibly valuable component of an investment portfolio.
The Essential Podcast is edited and produced by Molly Mintz.