Quarterly statistics commentary Q3 2012
This commentary summarises gold’s price performance in various currencies, its volatility statistics and correlation to other assets, and the macroeconomic factors that influenced gold’s behaviour during the quarter. It provides macroeconomic context to the investment statistics published at the end of each quarter and highlights emerging themes relevant to gold’s future development. In this issue, we explore the influences that unconventional monetary policy has on financial markets. In particular, we discuss the effect of central bank policy actions on gold.
Q3 2012 in summary
Gold (US$/oz) returned 11.1% in the third quarter as investors responded to further central bank measures aimed at stimulating the economy. Volatility decreased during the period, with gold prices experiencing little movement in the first half of the quarter; correlations to other assets, generally low, remained similar to those seen in Q2.
Central banks announced a continuation of their unconventional monetary policy programmes in Q3.
Central banks have numerous rationales for undertaking unconventional monetary policy, including lowering borrowing costs and supporting financial markets.
Financial assets have responded to central bank policy announcements, but gold’s reaction has been the strongest.
There is a consensus that these policies drive investment into gold purely due to inflation-risk impact. We believe that there is not one but four principal factors that provide further support to the investment case for gold:
Inflation risk
Medium-term tail-risk from imbalances
Currency debasement and uncertainty
Low real rates and emerging market real rate differentials
Third quarter review
By the end of September, gold (US$/oz) was up 16% year-to-date with two thirds of the gains generated in Q3. This performance was echoed in most currencies with returns ranging from 5.0% to 11.1%, using end-of-period gold price data, and 0.7% to 5.2% using average prices. The difference between these two measures reflects gold’s sharp price rise towards the end of the quarter.
Exchange rate shifts had a notable impact on some key regional gold prices. During the first half of the year Indian rupee depreciation caused the local gold price to breach a key psychological threshold, generating the strongest return of the 19 different currency-denominated gold prices monitored by the World Gold Council. That currency weakness reversed in the third quarter, leading to a modest return of 5% for gold in rupee terms. Consequently, the year-to-date performance of the rupee gold price ranked only 11th (+15.7%) as of the end of Q3.
For gold, as for many other assets, central bank policy announcements and actions in late August and early September created a catalyst for price activity. It is critical to note that while gold prices react to monetary policy developments, they are more generally determined by a geographically and thematically broad set of factors. A number of positive gold-specific developments also took place in Q3, including the IMF’s reporting of central bank purchases of gold by Russia, Turkey, Ukraine and the Kyrgyz republic. Just before the start of the third quarter, Turkey announced that it had raised to 30% the proportion of gold held by commercial banks as capital requirements. This requirement will likely boost demand as Turkish commercial banks use gold as part of their capital portfolios.
Price volatility during the period was subdued, ranging from 11.4% for rupee investors to 16.4% for yen investors. Gold’s lower than average volatility was echoed in other markets: global equities, bonds and commodities all posted numbers below their long-term averages.2
Correlation statistics between gold and other assets were similar to those experienced in Q2 2012 (see Chart 2). Its correlation to developed and emerging market equities was slightly higher than normal, but its correlation to global bonds and commodities was lower than in Q2. However, these deviations from long-term averages were not large enough to imply atypical behaviour. In prior quarterly commentaries we have shown how gold’s correlation to equities hovers around zero over the long run, but can fluctuate over shorter periods of time.
In particular, both gold and equity prices moved higher during Q3, leading to an elevated correlation. However, prices were driven higher by different underlying reactions. While both responded to monetary policy announcements and measures undertaken by central banks around the world, equities responded to central banks’ pledges to stimulate economic growth; gold, on the other hand, moved higher encouraged by factors that we discuss in the section titled “unconventional monetary policy and gold”.
Unconventional monetary policy
Events leading up to Q3 announcements
The key developments in Q3 were undoubtedly the series of declarations by central banks to expand their unconventional monetary policy programmes (UMP). Weak global macroeconomic data during the preceding quarters had created expectations among investors of further stimulus from major central banks. However, policy meetings were not scheduled until the latter half of Q3; thus, positioning for outcomes was kept on hold in anticipation of announcements. In addition, a concomitant slowdown in both India and China had also raised hopes that the Reserve Bank of India (RBI) and People’s Bank of China (PBoC) would act, fiscally or monetarily, to support their economies. Similar sentiment had been expressed in Brazil and South Korea.
As the quarter progressed, the case for further easing was emboldened by the weak incoming macroeconomic data. Global manufacturing indicators fell to a 36-month low in July – with noticeable slowdowns in the US and Europe.3 China’s industrial production growth reached the lowest level since May 2009, with GDP following suit to reach 7.6% YoY. The euro area contraction continued with 6 of 17 member countries in recession.4 Japan’s trade deficit quintupled to US$32bn, as a worsening export outlook compounded internal weakness.5 The news flow, though by now largely expected and supportive of further easing, helped drive asset prices higher across the board.
By the final week of August, the Federal Reserve (Fed) provided the first hints that it would consider an extension of its QE programme, despite some signs of housing and retail sector buoyancy. In addition, the European Central Bank (ECB) announced plans for its new bond buying programme on the premise of an ‘irreversible’ euro plagued by severe dislocations in the region’s government bond markets. By September, central-bank commitment to further stimulus had been announced in the US, Europe and Japan. China had launched a new infrastructure-spending programme to the tune of US$158bn, and India had vowed to lower its barriers to foreign investment.
The Fed extended its quantitative easing programme to an open-ended run rate of US$40bn per month. The ECB announced a new bond buying programme named “outright monetary transactions” (OMT), and the Bank of Japan (BoJ) announced a boost to its asset purchase programme, surprising markets by doubling the size of earlier extensions.
By the end of the quarter, gold was 11.1% higher, global equities finished up 6.2%, commodities were up 11.5% – the best performance since the first quarter of 2011 – and global bonds saw yields fall further and prices edge up 3.3%. Weakening economic data had finally spurred a concerted reaction by central banks, leading to a sharp rally in asset prices as the long wait for further easing came to an end.
Rationale and effect of unconventional monetary policy
Universally, the motivation for UMP is the need to remedy anaemic economic activity in the face of fiscal restraint and already exhausted conventional monetary policy. Central bankers hope a policy of asset purchases will, in the short to medium term, lower borrowing costs and increase perceived wealth through rising asset prices. The weakening of a domestic currency would also be a welcome spur for the export sector. Using these motivations, central banks have undertaken unprecedented monetary policies since 2008