There were three potential scenarios for the US economy heading into this year. First, if the Federal Reserve's (Fed)1 interest rate guidance proved prudent, the economy was indeed very strong and would need continued interest rate hikes to slow the pace of growth. Second, if the market's interest rate expectations proved correct, inflation would fall to a level where the Fed would need to start cutting rates early in 2024. And third, if past is prologue the Fed would over-tighten and cause a recession after raising interest rates too far based on lagged, backward-looking economic data. The prevailing sense of economic uncertainty had sown confusion among investors, who sent mixed signals about how to proceed.2
Two-and-a-half months into the year, this economic uncertainty has translated into asset price volatility with exceptionally large swings in bond market interest rates. Based on strong but seasonally adjusted economic data, February's bond market selloff pushed interest rates 80-100 basis points higher. In contrast, the banking crisis in early March caused interest rates to drop 80-120 basis points. In fact, by March 15 the two-year Treasury yield had fallen to levels last seen in September, at 3.89%.3 And on March 15 the MOVE index,4 a measure of bond market volatility, jumped to 198 from 99 on January 31, spiking to levels not seen since December 2008.5
In the equity markets, the S&P 500 Index6 reached its 2022 low on October 12. Since then (through March 15) the S&P 500 had returned 9.65%, including dividends.7 However, that trailed the 14.67% gain in the price of gold through the same period . The uptick in gold has come despite investors selling their gold ETFs.
Specifically, investors last year sold 12.8 million ounces of gold in ETFs from 4/20 to 12/30.8 Meanwhile, central banks and official treasury purchases totaled 1,136 tons in 2022. That's the highest official purchase total since 1969.9 Perhaps it is no coincidence that 1969 also saw the US funding both a large foreign war and expensive domestic social policies amid a volatile foreign-exchange environment.
It's not just foreign governments that want gold. Gold miners are also on the prowl for more gold, but volatile interest rates, rising mining costs, and production issues have made it easier to try to buy competitors in order to boost production rather than finding new mines to dig.10 On February 5, Newmont, the largest gold miner by output, made a $17 billion bid for Newcrest. The deal hasn’t closed, but talks continue.11 Elsewhere, Gold Fields and AngloGold formed a new joint venture to combine neighboring mines in Ghana to create synergies.12
Bond and stock markets are volatile amid an unsettled economic environment and a banking system that is being stress tested. As a result, investors who sold gold last year might regret that decision. However, with the unsettled US economy and potential for interest rate cuts, an allocation to gold may continue to benefit a diversified portfolio.
1 Federal Reserve- the central bank of the United States;
2 https://www.wsj.com/articles/last-year-investing-seemed-easy-not-anymore-11673128421
3 Bloomberg data 9/21/2022 to 3/15/2023;
4 The MOVE Index is a well-recognized measure of U.S. interest rate volatility that tracks the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries;
5 Bloomberg data 12/15/2008 to 3/15/2023;
6 S&P 500 - stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States;
7 Bloomberg data 10/12/2022 to 3/15/2023;
8 Bloomberg data 4/20/2022 to 12/31/2022;
9 https://www.reuters.com/markets/commodities/central-banks-bought-most-gold-since-1967-last-year-wgc-says-2023-01-31/
10 https://www.ft.com/content/8ca4f858-0807-4400-87e7-c5902d16225b
11 https://www.newmont.com/investors/news-release/news-details/2023/Newmont-Confirms-Proposal-to-Combine-with-Newcrest/default.aspx
12 https://www.goldfields.com/in-the-news-article.php?articleID=12998
IMPORTANT INFORMATION
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
Trading in commodities entails a substantial risk of loss and is not suitable for all investors.
Diversification does not eliminate the risk of experiencing investment losses.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
ALPS Distributors, Inc. is the marketing agent.
There are risks associated with investing including possible loss of principal.
ALPS is not affiliated with abrdn.
ETF002021 3/31/24
US-160323-189611-30
There were three potential scenarios for the US economy heading into this year. First, if the Federal Reserve's (Fed)1 interest rate guidance proved prudent, the economy was indeed very strong and would need continued interest rate hikes to slow the pace of growth. Second, if the market's interest rate expectations proved correct, inflation would fall to a level where the Fed would need to start cutting rates early in 2024. And third, if past is prologue the Fed would over-tighten and cause a recession after raising interest rates too far based on lagged, backward-looking economic data. The prevailing sense of economic uncertainty had sown confusion among investors, who sent mixed signals about how to proceed.2
Two-and-a-half months into the year, this economic uncertainty has translated into asset price volatility with exceptionally large swings in bond market interest rates. Based on strong but seasonally adjusted economic data, February's bond market selloff pushed interest rates 80-100 basis points higher. In contrast, the banking crisis in early March caused interest rates to drop 80-120 basis points. In fact, by March 15 the two-year Treasury yield had fallen to levels last seen in September, at 3.89%.3 And on March 15 the MOVE index,4 a measure of bond market volatility, jumped to 198 from 99 on January 31, spiking to levels not seen since December 2008.5
In the equity markets, the S&P 500 Index6 reached its 2022 low on October 12. Since then (through March 15) the S&P 500 had returned 9.65%, including dividends.7 However, that trailed the 14.67% gain in the price of gold through the same period . The uptick in gold has come despite investors selling their gold ETFs.
Specifically, investors last year sold 12.8 million ounces of gold in ETFs from 4/20 to 12/30.9 Meanwhile, central banks and official treasury purchases totaled 1,136 tons in 2022. That's the highest official purchase total since 1969.10 Perhaps it is no coincidence that 1969 also saw the US funding both a large foreign war and expensive domestic social policies amid a volatile foreign-exchange environment.
It's not just foreign governments that want gold. Gold miners are also on the prowl for more gold, but volatile interest rates, rising mining costs, and production issues have made it easier to try to buy competitors in order to boost production rather than finding new mines to dig.11 On February 5, Newmont, the largest gold miner by output, made a $17 billion bid for Newcrest. The deal hasn’t closed, but talks continue.12 Elsewhere, Gold Fields and AngloGold formed a new joint venture to combine neighboring mines in Ghana to create synergies.13
Bond and stock markets are volatile amid an unsettled economic environment and a banking system that is being stress tested. As a result, investors who sold gold last year might regret that decision. However, with the unsettled US economy and potential for interest rate cuts, an allocation to gold may continue to benefit a diversified portfolio.
2 https://www.wsj.com/articles/last-year-investing-seemed-easy-not-anymore-11673128421;
3 Bloomberg data 9/21/2022 to 3/15/2023;
4 The MOVE Index is a well-recognized measure of U.S. interest rate volatility that tracks the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries;
5 Bloomberg data 12/15/2008 to 3/15/2023;
6 S&P 500 - stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States;
7 Bloomberg data 10/12/2022 to 3/15/2023;
8 Bloomberg data 10/12/2022 to 3/15/2023;
9 Bloomberg data 4/20/2022 to 12/31/2022;
10 https://www.reuters.com/markets/commodities/central-banks-bought-most-gold-since-1967-last-year-wgc-says-2023-01-31/;
11 https://www.ft.com/content/8ca4f858-0807-4400-87e7-c5902d16225b;
12 https://www.newmont.com/investors/news-release/news-details/2023/Newmont-Confirms-Proposal-to-Combine-with-Newcrest/default.aspx;
13 https://www.goldfields.com/in-the-news-article.php?articleID=12998;
IMPORTANT INFORMATION
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
Trading in commodities entails a substantial risk of loss and is not suitable for all investors.
Diversification does not eliminate the risk of experiencing investment losses.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
ALPS Distributors, Inc. is the marketing agent.
There are risks associated with investing including possible loss of principal.
ALPS is not affiliated with abrdn.
ETF002021 3/31/24
US-160323-189611-30