The following is a re-post from the World Gold Council. The original is here.
Gold has gained more than 3% this week largely attributed to an escalation of geopolitical tensions linked to the Israeli-Palestinian conflict.1
As a crisis hedge, gold has a solid history, driven by its lack of credit risk and negative correlation to risk assets. But it is likely that geopolitical tensions on their own might influence gold returns, even when accounting for the change in other factors. We set out to test this idea.
Capturing the transmission channels of geopolitical risk can be challenging. Political context, geographical concentration and the likelihood of proliferation all matter, as does whether the increase in risk comes from a perceived threat or an actual act of aggression.
Also, many historical episodes are too idiosyncratic to act as useful guides. Fortunately, a number of indices exist to quantify geopolitical risk. Arguably the most well-known is the Geopolitical Risk (GPR) index by Matteo Iacoviello that measures both actual and perceived geopolitical tension.2 The GPR index has a reliable track record of reflecting observed impacts to underlying economic variables at a global level.
Chart 1. The Iacoviello GPR index consistently captures historical acts and threats of geopolitical tension
Source: Matteo Iacoviello, World Gold Council
We use our Gold Return Attribution Model (GRAM) to quantify the impact of key drivers on gold returns, both on monthly and weekly frequencies.3 It is an invaluable and historically accurate guide. But from time to time, the model produces a more noticeable residual. When this occurs, the likely culprit is either a missing factor or a change in the sensitivity of gold to the existing factors.
In 2022, for example, there were at least two instances of these more sizeable residuals: in Q2 and Q3. We know subsequently that there was considerable central bank buying during these quarters, and the Russian invasion of Ukraine occurred in late February – two factors that are not explicitly included in our model and are likely candidates for missing variables. We don’t currently have a reliable series to capture non-reported monthly central bank buying, but the GPR could conceivably capture the additional impact of geopolitics on gold.
This is what our analysis shows. Even though the model already includes inflation, bond yields, currencies, crude oil and implied gold volatility – variables likely to respond to a rise in geopolitical tension – the impact of the GPR index is visible,4 and it adds to the model’s explanatory power.
Chart 2: By adding the GPR index to GRAM, we can quantify gold’s geopolitical risk premium
Source: Bloomberg, World Gold Council
For more on GRAM see here. GPR is added as the de-meaned log of the GPR index.
The conclusion we can draw from this is that gold – likely via investor flows – responds to elevated geopolitical risk even when controlling for the movement in the existing variables in the model. And we can attach a number to this response: an increase in the GPR index by 100 units holding all else constant, has a c.2.5% positive impact on gold’s return. For example, the GPR index rose from under 100 to over 250 at the start of the Russia-Ukraine conflict last year, while 9/11 saw it spike above 450 from under 50.
GPR index spikes have in recent times been short-lived, however. This partly reflects a shorter news cycle than in the past. It does not suggest that gold’s reaction is short-lived, as the follow-through from a spike to other variables and sentiment can potentially last longer. But there is also a slight medium-term risk for gold from a rise in tensions, via higher inflation for example, which could potentially delay a gold-friendly monetary pivot by the Fed and other central banks.
In summary, gold’s performance this week is not a coincidence and can be measurably attributed to the Israeli-Palestinian conflict. How long this effect will last will depend on the wider ramifications the conflict may have on the global economy. And, in either case, given the increased frequency and unpredictability of geopolitical risks, it further supports the case for a consistent, strategic allocation to gold.
Footnotes
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Based on the LBMA Gold Price PM between 6 and 12 October 2023. Gold’s performance over the period was also supported by the 20-basis point fall in US 10-year TIPS yields and a small drop in the US dollar.
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Matteo Iacoviello is a Senior Associate Director of International Finance at the Board of Governors of the US Federal Reserve System.
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GRAM is a multiple regression model of weekly and monthly gold price returns, comprised of approximately 15 explanatory variables which we group into four key thematic driver categories of gold’s performance: economic expansion, risk & uncertainty, opportunity cost, and momentum.
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The coefficient is positive and statistically significant at the 5% level but its individual contribution is relatively small, as there are other variables that are also responding to changes in geopolitical risk, as we saw the oil price do over the weekend for example. Model R-squared increases to 0.645 from 0.635 following the inclusion of the GPR. We isolate the total impact of GPR by removing other current variables from the model.
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22 Comments
Gold's a terrible bet compared with say income producing shares or property. Especially physical gold which is illiquid, dangerous to store at home and has exorbitant buy/sell margins.
Gold is down hugely against the US stock market the last few years and the SPDR GLD shares tonnage has dropped 54 tonnes so far this year.
Gold salesmen like Peter Schiff and Jim Rickards encourage get-rich-quick investors with threats of global conflict and economic meltdowns.
I'm certainly not being dramatic. Gold stored at home isn't insured unless it's specifically mentioned on your policy, and if word got out that you had a 'stack' at home you might be getting a visit from burglars. Goldbugs do some very eccentric things. I read an article a while back about a guy who buried his gold in the backyard. Unfortunately he died suddenly, so his family dug up the entire backyard in search of the gold, without finding it.
Apart from that it's illiquid and the buy/sell margins are extortionate. Why would anyone buy a chunk of gold (which has zero dividend by the way) when they can get gold exposure with a very liquid vehicle like SPDR GLD?
Simple, there is no counter party risk. All your lines of computer code can disappear in a flash!
At least physical metal can be held, stored and traded without any third party requirement.
Its not all about a dividend, it’s partly about the safety of capital.
Gold, the ultimate store of wealth !🤣
Even if my computer code disappeared, what would I do with a chunk of gold? Eat it? If I was going to sell it, who would buy it, how would I prove it wasn't fake? People buy fake gold all the time.
In the very unlikely event of some catastrophic event you won't need a chunk of metal, you'll need food, land, water, shelter, firearms, ammo and maybe animals, not a piece of metal. Who would want a useless metal? It's a myth perpetuated by internet gold salesmen. Every year they post predictions of how the gold price will 'moon', but when it doesn't happen they delete them and replace them with updated prophecies. And a regular feature are the words "counterparty risk". It's BS.
Have you got it insured? Probably not, because that would be letting others know you've got a 'stack' at home.
Guess one either understands the benefits or one doesn’t. I’m not out to convince anyone.
Physical metal is a small part of a balanced outlook on life. That’s all.
I’m not sure why it provokes so much anger when it’s simply a passive store of value, which can never be measured in terms of Fiat currency.
It’s so much better than that !
Last month in a test to see how easy it would be to sell I walked into a small town coin/gold shop in the Midwest. Produced a 1oz Perth Mint. He checked it out, and gave me $10 over spot gold in 18 US hundred dollar bills plus change. No identification. I walked out the door.
Gold's a terrible bet compared with say income producing shares or property.
Kind of nonsense and does not mean that a portfolio should have no allocation to gold.
The Nikkei 225 is up 36% in the past two years. And XAUJPY is up 46% over same time period. Allocation to both would have been good. The bull run ending in 1980 was approx 23x. No other asset class really compared.
Especially physical gold which is illiquid, dangerous to store at home and has exorbitant buy/sell margins.
Also nonsense. Allocation to assets like PMGOLD and digital gold are both liquid, safe, and have low cost margins.
Im thinking ring weights are not what they used to be ... I got lucky once long ago bought a chinese gold ring off tradewe for $24 it had chinese stamping but no indication of gold content...I looked at the image and it looked like 24k just richness of the color in the image.... it was a simple band ring ...I got it and knew straight away it was genuine gold just by the weight of it...16g ... I took it to a local manufacture jeweller and he opinion it was either 22k or 24k (i thought 24k by the color) he put me onto a place to get it tested and advised he would stamp it for free if I bought him back the result....the test cost me nothing but a scraping...it turned out to be 22k and I got it stamped....Have not come across anything similar by weight since.... I wore it for a few years then cashed it out....Ive had some luck poking around pawn shops as well...saw a 3 stone mens 14k tagged fake diamond ring for 240 dollars (20years ago) I looked at the stones which were a decent size and opinioned them to be real, I bought the ring ...next day I took it to another pawn shop and they did a stone test on it...the dealer offered me 450 for the ring I sold it....lol Gave up chasing bargains at the pawn shops not long after but can say Ive visited a few jewellers and held rings in my hand and they just dont seem to have the weight they used to. I suspect hollowing is going on.... The above poster is correct when he says there is risk involved in storing Gold . I once had 3 Canadian maples when they were about 3or400 an oz (guesstimate along time ago) Not sure id be comfortable with them now. You would need a safe place . Funny thing about the Maple is I bought them from Goldcorp , they wanted to issue me a certificate...I said no thanks Il take it with me...glad I did....lol....Hard to grind out a quick buck these days from metals...I certainly dont see the value some do in Silver and wonder if such hasnt distorted the Gold market...my 10 cents
Many people believe gold cannot 7x without the world falling apart. However, the previous bull markets returned approx 23x and 9x respectively. Although much bad has happened, mankind isn't extinct yet.
Huge debt creation/purchasing power loss accumulated (and coming again soon in the next few years) can potentially fuel (and quite possibly doing so as I type) the next bull phase.
You might even argue that gold has to to do at least 7x to stop the world falling apart. Collateralising all of the sovereign debt created by money printing is potentially taking gold, silver, bitcoin, and other commodities to massive new highs.
In 1980 gold was about US$870, today it's US$1,980, so if you bought in 1980 you've made a huge loss inflation-adjusted.
Adjusted for inflation gold is an awful investment, but goldbugs will often justify loading up on it because of WW3, hyperinflation, stock market crashes, money becoming worthless, we're 'running out', it's 'real money' (which it obviously isn't), Fort Knox is empty, and some eccentrics even bang on about gold 'confiscation', but the fact is, no one cares how much gold anyone's got, anymore than they care how much aluminium you've got stored at home.
When gold goes down, goldbugs never blame themselves, they blame central banks, JP Morgan, the 'banksters' and all manner of other assorted 'criminals' for gold 'suppression' and hark back to the Great Depression for proof that they've got it right.
The internet's chokka with gold salesmen flogging the stuff, with all kinds of stern warnings about the consequences of not having a 'stack' when the balloon goes up. 99.9% of it is crap.
There's lots of gold 'stacked', so as soon as the price goes up it can be liquidated. In the old days, mining gold was a laborious and dangerous exercise, today, with new technology like massive diggers, trucks, crushers, satellites, drones, the internet etc. gold can be located, excavated and marketed quickly. The amount of gold excavated annually is going up almost exponentially.
Exposure to gold can be achieved in many different ways in 2023. There's listed gold funds that don't own an ounce of the stuff, funds that can magnify gains or losses 2 or 3 times. There's also funds that can short gold for those that think the price is going to decline.
On a lighter note, who remembers Ray Smith and Goldcorp? Ray stored gold for about 1,600 'investors'. After the stock market collapsed the 'investors' wanted their gold, but the cupboard was bare, and Ray had decamped to Park City, Utah, with his mistress.
The author represents the World Gold Council, an entity with a vested interest in seeing the price go up.
China has now sent 4 navy war ships to the middle East to join the Iran's proxy/Israel war.
I really enjoy watching gold "go up" in price... but really we all know gold is not actually going up, rather it's the dollar devaluing. There is definite demand for it these days, it turned into a bull market in 2015, but now it's very obvious. Looks expensive, but still undervalued.
The USD isn't devaluing, the DXY, the USD Index, compares very favourably with gold, and it's just a currency. The stock market thrashes gold though, and it's got a dividend as well. It's a myth that gold's a good investment.
The XGD, the Aussie stock market gold index, has been declining since 2020.
https://www.youtube.com/watch?v=WLB5CR9np6g&t=62s
I really enjoy watching gold "go up" in price... but really we all know gold is not actually going up, rather it's the dollar devaluing.
This is true. But actually gold does not always 'go up'. In fact the price has been suppressed by certain actors in the West. In that respect, gold is definitely different. And the sheeple are not encouraged to have any allocation to gold for any particular reason. It does not benefit the ruling elite whose biggest issue at present is the shifting world order - what is understood as normal in the Anglosphere is no longer the de facto reality.
I knew it...eventually there would be a poster that invokes the eccentric 'suppression' theory, without a scrap of evidence of course. Anyone who hasn't got a 'stack' are 'sheeple', that the price of gold cannot fall, it's always 'manipulated' lower by a cabal of banksters, politicians and riggers.
And of course we must never discuss the massive gold selloffs in 1915-20, 1941, 1947, 1951-1966, 1974-1976, 1981, 1983-1985, 1987-2000, 2008, 2011 and 2020.
I knew it...eventually there would be a poster that invokes the eccentric 'suppression' theory, without a scrap of evidence of course.
Best you educate yourself on how precious metal markets are manipulated.
Quick normie lesson: Spoofing entails putting in fake orders in the markets to buy or sell and then withdrawing those orders before they are executed with the intention of moving the price.
https://www.cnbc.com/2020/09/29/jp-morgan-settles-spoofing-lawsuit-alle…
Gold is insurance not an investment. Insurance against the central bankers losing control of their fiat money systems – just don’t believe anyone that thinks they know what will happen to the price or when.
Central banks have completed trillions of dollars of asset purchases (quantitative easing) in the last 10+ years. They didn’t do that without having the price of gold under their thumb.
From Willem Middelkoop’s Patreon account.
The gold price is set by the London Bullion Market Association (LBMA), founded in 1987, represents the global OTC bullion market, and is considered the authoritative body on precious metals. Noteworthy is that the LBMA is tightly overseen by The Bank of England, making its self-proclaimed 'independence' suspect.
A common assumption is that the gold price is discovered based on physical metal's supply & demand dynamic, but this is untrue. The price is set by market participants trading paper certificates representing non-existent gold.
Although all commodity futures markets deal in such paper promises, most commodities are delivered and consumed. This inherent consumption limits the distortion in these markets. Gold, however, is an exception. Instead of being consumed, it's primarily saved, used as currency, treasured for its value, or made into jewellery. A large portion of gold bought on futures markets isn't delivered but is left as deposits with futures exchanges or banks.
While the core tenet of gold investment states, "You can't print gold," the reality is that "paper gold" can be produced limitlessly, much like regular currency. And indeed, its production has been near-boundless. The backing ratio for the LBMA's unallocated account system is ambiguous, as banks, the LBMA, or regulators publish no official figures. However, the ratio of unallocated balances to their gold backing could range from 20:1 to 100:1, meaning that for every ounce of gold in the LBMA's vault, there are 20 to 100 claims.
For those skeptical about the U.S. government undertaking such actions: The Gold Reserve Act of 1934 allows the U.S. Treasury Department's Exchange Stabilization Fund to confidentially trade in all markets, including gold, on behalf of the U.S. government. This fund is only accountable to the treasury secretary and the president.
While the core tenet of gold investment states, "You can't print gold," the reality is that "paper gold" can be produced limitlessly, much like regular currency.
Yes. This is true. However, this is where the Perth Mint has an advantage over the likes of JP Morgan with paper gold. It is also a fantastic proposition for gold in custody and ownership distributed via blockchain.
Furthermore, the Chinese have threatened the West's corrupt gold markets. Spot prices are starting to get out of whack with those in China. At the moment, it seems that our ruling elite don't give a rats. However who's really calling the shots? That is the question.
The Chinese have been slowly entering the gold market over the last 10+ years by creating metals exchanges etc. However no govt/central bank (CB) anywhere in the world wants the price of gold to suddenly take-off. It could create panic and casts doubt on any fiat currencies, this could lead to civil unrest etc – no central banker (eastern or western) wants that.
Even if China have plenty of gold, I doubt a Chinese CB wants western economies to have hyper-inflation due to a gold revaluation. China still wants to export goods to the west.
However we yes we know the eastern govts are increasing the amount of gold in their reserves. Maybe just to diversify and reduce the amount of $US they hold or maybe they think gold will be revalued in future – we don’t know for sure.
Spot prices in the east and west have gotten out of whack before. The CB’s price management schemes in the futures markets ‘take the heat’ out of the price rise and in a week or a month (when the geopolitical tension has died down, or when the stress in stock markets has reduced etc) they can bring the gold price back down and the east/west spot price differences reduce again.
I think any gold revaluation would be avoided by all CB’s unless it became inevitable. They can avoid a revaluation unless global demand for the physical metal outstrips supply – probably for months, not just a couple of weeks. A large war might do it.
Perth Mint is more reputable than JPM, however I would still diversify where anything is held. If the SHTF and western economies are scrambling to improve their gold reserves then who knows what individual govts will do. They will change laws to create financial stability.
Middelkoop sells the stuff, what do you think he's going to say?
And if you think it's 'manipulated ' downwards, go short and make a fortune. And I knew it, someone would eventually hark back to the good ol' days of the Great Depression, 1934.
The 'paper gold' myth is a goldbug fantasy. How about 'paper' zinc, 'paper' property, 'paper' steel, 'paper' copper, 'paper' cows, 'paper' oil, 'paper' soybeans etc.
Gold salesmen prey on the gullibility of 'stackers'.
Goldbugs are always talking about how much gold the chinese have got, but in the real world no one cares, the same as they don't care how much gold the USA has. It might a buy a couple of warships, that's it.
What 'gold revaluation'?
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