IMF says a relevance of holding gold

The positive link between

global economic expansion and gold

The IMF Global Financial Stability report, released, highlighted an increase in the level of risk among multiple global metrics. Following its publication, stocks in the US, Europe and Asia lost 4%, 3% and 4% respectively over three days. While the market has regained some of its early losses, we believe the report and the subsequent market pullback underline the relevance of holding gold in the near and long term.

Last week stocks sold off, and gold acted as a key flight-to-safety asset in the market. Initially, as the US market retreated, gold held steady. But as the sell-off became more systemic globally, gold began to rally meaningfully.

De facto gold has fallen by more than 11% from its April high and is currently around 7% lower y-t-d amid bearish investor sentiment. Much of this performance has been driven by a risk-on appetite in the US, where the dollar – which historically is inversely correlated to gold – has appreciated by 7% since early Q2.

Additionally, the positioning in the gold futures markets in COMEX – the largest and most liquid gold futures market in the world – has seen record short positioning. Money managers’ net shorts are near record lows since data became available in 2006, and the net speculative position from the legacy COTR-- which we define as the sum of the non-commercial and non-reportable positions is near negative levels last seen in 2001.

These headwinds for gold have been warranted. But as the IMF signalled in its 2018 Global Financial Stability Report, an increase in commonly used metrics of risk highlight the relevance of including gold in a portfolio both for the near and long term – from a tactical and strategic perspective.

The positive link between global economic expansion and gold has, historically, provided an important contribution to its long-term performance. But its role as a diversifier and tail-risk hedge has been fundamental too, and its price has been boosted as markets have faced systemic risks.

While there have been headwinds for gold over the past six months, there are clear reasons, based on the IMF’s most recent report, for gold to move upwards. The global economic recovery has been uneven, hurting EMs; complacency has crept into the market, questioning liquidity; market valuations are at extreme levels; debt has grown substantially globally, and increased tightening could hurt markets.

All these factors, either individually or in combination, could be catalysts for a risk-off environment that could propel gold higher.