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GOLD | World Gold Council
WORLD GOL
The world’s authority on gold looks ah
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LD COUNCIL
head in its Gold Outlook 2020 report
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GOLD | World Gold Council
One of the standout performers in the global investment market in 2019 was gold, which enjoyed its best year in close to a decade to finish 18.4% higher (in US dollar terms) than it did in 2018. Changing dynamics in the global geopolitical and economic spheres pushed investor gold demand higher, and these conditions are likely to remain generally supportive of gold in 2020, according to the World Gold Council. The global authority on gold published its Gold Outlook 2020 report in mid-January, which focuses on the interplay between market risk and economic growth that will drive gold demand this year. The report also introduced the council’s new web-based quantitative tool for gold investors – Qaurum. RGN’s editor finds out more in an interview with the Council’s director of investment research, Juan Carlos Artigas. Jacob Ambrose Willson: Before we get into the Gold Outlook 2020 report, I’d like to ask you about the performance of gold in 2019. What were the key reasons behind gold enjoying its best year since 2010? Juan Carlos Artigas: There are two major factors that are relevant in explaining gold in 2019. Firstly, the level of financial market uncertainty that investors faced. There was a steady stream of risks popping up last year. It was a collection of various potential concerns that investors had across the world. These concerns related to trade, geopolitics,
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GOLD | World Gold Council
Resource Global Network valuation of the stock market and many other Monetary policy will remain loose. We will not things that kept investors on their toes.
necessarily see central banks cutting rates at the same rate they did last year. Some of
In addition to that, and in part in response
the statements from the Fed and other banks
to the uncertain environment, central banks
is that they are monitoring the situation,
around the world made monetary policy
but more likely than not (and this is a fairly
more flexible, either by reducing interest
consistent view across financial markets),
rates or expanding alternative tools to
interest rates are not likely to increase
monetary policy such as quantitative easing
any time soon and may even continue
or so-called quasi-quantitative measures.
to decrease. This provides an additional
All that reduced the opportunity costs of
level of support for gold, particularly as an
investing in gold as well as other asset
investment.
classes. We do acknowledge in our outlook that, Of course, once the price of gold started
because of the price performance of gold
to rally that created a third ancillary factor
and the fact that price volatility may remain
which is momentum. When you start to
at the same heightened levels we saw last
see momentum playing in favour of gold,
year, some softness in consumer demand is
you will see more activity in the investment
expected, particularly in jewellery and retail
market, and that’s what happened in 2019.
in key markets like China and India. We saw
This was not only individual and institutional
that in the first three quarters last year and
investors but also central banks adding to
expect that trend to carry into 2020.
gold demand. It is important to note that India and China JAW: To what extent are we going to see a
have been instituting structural changes to
continuation this year of the trends that
their economies with a view to strengthening
drove gold up in 2019?
local ties and making them less reliant on trade agreements with the West. That should
JCA: We flagged in the Gold Outlook 2020
be more supportive of gold in the long
report our belief that market uncertainty is
term, but in 2020, we may see some of this
not going away this year. It’s not going to be
softness playing on.
exactly the same dynamics as 2019, although some may continue. But as we can see from
JAW: The World Gold Council recently
the first month of the year, new concerns
released its new quantitative tool for gold
are materialising. Different risks are popping
investors – Qaurum. What is the main
up on different fronts and things we are
purpose of this tool?
supposed to have solved in 2019 seem more likely postponed than fully resolved, so risk and uncertainty isn’t going away.
GOLD | World Gold Council
ResourceGlobal GlobalNetwork Network Resource JCA: We built Qaurum for investors to
appropriately explained by the dynamics of
intuitively understand the interplay of
demand and supply. Demand and supply not
gold’s drivers and how that may impact
only in the sense of purely buying jewellery or
gold’s performance across different
gold-backed ETFs, but also what is happening
macroeconomic scenarios.
in the over-the-counter market.
We wanted to help investors understand
Once you have a full picture of the market
the drivers of gold appropriately and
and how this interacts with the supply side, in
understand how they interact, in part
particular mine supply and recycling, you can
because there is a dual nature to gold. It’s
historically very well explain the behaviour
not just an investment and an asset to utilise
of gold. Gold may not necessarily follow
in periods of risk or uncertainty, it’s also a
traditional gold valuation methods such
productive asset that is used in jewellery
as cash flow modelling because it doesn’t
and the production of electronics. There
have credit risk. But that doesn’t mean
is a dual nature to gold and it is important
that investors cannot value it. In fact, gold’s
for investors to understand that the
valuation is more intuitive because it goes
interaction between these two sides is key to
back to the principle of demand and supply
understanding gold’s long-term performance.
and market equilibrium. The GVF explores how you can utilise market equilibrium to
In the short term, market participants may
establish an appropriate framework to value
focus on gold as an investment with interest
gold.
rates or the dollar as guidance for short-term performance, but once you look at longer-
Qaurum is a web-based tool that utilises an
term performance over a year, five years
econometric model based on the GVF, where
or 20 years, you start to understand the
investors can understand the impact of
interaction between these two sides, which is
different drivers of gold and the performance
key to unlocking gold’s potential.
of gold in three easy steps.
JAW: Can you take me through the
First, users can select a pre-populated
mechanics of Qaurum, in terms of how it
macroeconomic environment developed
will be used by gold investors?
by the think tank Oxford Economics. They publish quarterly different macroeconomic
JCA: Qaurum is powered by our Gold
scenarios based on their models and their
Valuation Framework (GVF). The GVF is
interactions and understanding of investor
a methodology we developed that has
concerns. We take those inputs and allow
been academically validated. It’s based on
investors to select the one they feel more
the principle that the gold price and gold
appropriately reflects their own views.
performance reflect market equilibrium. In other words, the price of gold can be
GOLD | World Gold Council Next, users can view how those scenarios may influence demand and supply for gold. The third step is to calculate the implied performance or change in the price of gold required to ensure that the market is in equilibrium. The additional powerful feature in Qaurum is that we allow investors to customise their own scenario. Any scenario they see, they can modify if they have a slightly different perspective on some of the key variables driving gold. We bucketed these variables into four categories: 1) Economic expansion 2) Risk and certainty 3) Opportunity costs 4) Momentum. Economic expansion is the positive link that economic growth has on the procyclical side of gold, in particular jewellery and technology. Risk and uncertainty and opportunity costs tend to influence more of the performance of gold in the context of investment, whether it is by individuals, institutions or central banks. Finally, momentum and trends can influence different aspects and behaviours in the market across various groups. JAW: Finally, broadly speaking what will the World Gold Council be focusing on over the course of the year? Are there any specific areas or initiatives that will be examined in 2020? JCA: We often look at the gold market from different perspectives and try to make sure that the market is as transparent and
World Gold Council director of investme research, Juan Carlos Artig
Resource Global Network accessible to investors. We tend to spend time thinking about how we can interact with the industry and various regulating bodies to see how the gold market can become stronger and more accessible. There has been quite a lot of focus on ESG and climate change in recent years and World Gold Council has been active in this area across a number of fronts. In 2019, we released our Responsible Gold Mining Principles, and continue to focus on the relevance of ESG for investment. In addition, from the perspective of research, we want to make sure that investors properly understand the drivers of gold, how it behaves and why it behaves in the way it does, so that they can feel more comfortable to make strategic decisions on gold. We also want to help investors not only understand gold in the absolute but how it compares and interacts with other asset classes. For example, gold compared to a broad commodity basket exposure and what may be better in terms of portfolio performance. We published a paper last year comparing the two, highlighting how gold may be a better strategic asset, even if investors still maintain more tactical exposures to broader commodities.
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Published by Anderson Murray Media Ltd
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