What Goldbugs Have Been Waiting For: Goldman’s New Primer On Gold
The comments above & below is an edited and abridged synopsis of an article by Tyler Durden
Goldman Sachs has released a report in which it says it believes precious metals remain a relevant asset class in modern portfolios, despite their lack of yield, and disagrees with those who say gold is a relic. “…we can clearly see why precious metals were initially adopted and why they remain relevant today.”
There was a new take on what constitutes fear as “in our new framework we see a closer link to growth expectations…Stated more simply, we are talking about the drivers of ‘risk-on/risk-off’ behavior in markets.”
As for wealth, the good news for gold was that “as economies grow, they tend to go through a rapid gold accumulation phase at around per capita GDP of $20,000-$30,000… As more EM economies (including China) are set to grow to these income levels over the next few decades.”
Goldman found that the ratio between gold purchases and household savings has been stable at around 1.7% for almost 40 years.
Solving the equation for the real price of gold suggests that gold is positively correlated with savings and negatively correlated with the value of mine supply and net central bank selling.
Goldman’s analysts tweak the model to improve the fit from fear variables, mainly risk-off periods when there are portfolio reallocations from equities to gold. They emphasized hedging gold’s role to systemic tail risk.
The report compares gold and cryptocurrencies, concluding that they are not the ‘new gold.’
The report touches on one critical feature of the gold market, noting that investors are more conscious of the physical vs. futures market distinction in the post-2008 crisis period. The fear drivers have tilted demand more in favour of physical gold (or physically backed ETFs) as a hedge against black-swan events.
Goldman doesn’t address the fact that the global gold market, including the LBMA, is a fractional reserve system, in which the ratio of paper to physical was estimated at 92:1 by the Reserve Bank of India.