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Abu Dhabi, UAEMonday 10 December 2018

Myth-busting leaves gold puzzle clearer

The rules of thumb that govern investing in the yellow metal are wide of the mark all-too-often

Number of people with $500m or more is on the rise and set to grow further in the region. Reuters
Number of people with $500m or more is on the rise and set to grow further in the region. Reuters

In a year when investors have been caught off guard by everything from emerging-market woes and the dollar’s tailwind to a brewing trade war, gold has been a conspicuous head-scratcher.

Why, investors ask, has the yellow metal tumbled as economic and geopolitical risks pile up?

Whether you blame it on ideology or the wretched complexity of global finance, the rules of thumb that govern gold investing are wide of the mark all-too-often. Busting five bullion myths right now could be key to understanding the current slide.

Myth 1: US rates drive gold

The received wisdom is that when inflation-adjusted yields rise, assets bereft of income streams like gold tend to suffer given the opportunity cost.

But that’s not what is behind the current slump.

The argument hasn’t rung true for a while now, in fact. There’s very little correlation between the metal and 10-year inflation-linked Treasuries, coming in at minus 0.2 on a rolling 120-day basis. And just look at what happens when the Fed raises rates.

The key driver of gold, in fact, is the dollar. Few assets have a stronger inverse correlation to the Bloomberg Dollar Spot Index. The 120-day rolling measure stands at minus 0.6, indicating that the metal and currency typically moves in opposite direction. Other assets priced in dollars, particularly commodities, also have inverse correlations by construction - but gold is by far the strongest.

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Fed effects

Myth 2: The precious metal is the anti-Dow

As an asset seen benefiting from haven demand, bullion goes up when stocks go down, right?

Not quite.

The shiny metal offers no such inverse correlation to equities - the metal’s co-movement to the Dow and Nasdaq was less than 0.03 in the past decade.

Its allure is down to very fact there’s little relation between the two, because portfolio managers can lower the amount of risk they’re exposed to per expected unit of return through buying unrelated assets.

True to form, a regression plotting movements in the S&P 500 against that of gold looks like it was fired from a shotgun.

Myth 3: The physical market never matters

Another supposition: consumers of physical metal, such as jewellery and coin buyers, wield little power. After all, gold is a tradeable asset overwhelmingly gripped by the ebbs and flows of global finance.

But while physical buyers aren’t key in fuelling rallies, real-economy demand has historically proved a faithful floor when prices have fallen.

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Up and down

Gold’s woes this year, therefore, may come as little surprise given the diminished appetite of a key marginal buyer: India. The world’s second-biggest investor has held back, driving global demand down to its lowest in almost a decade in the first half of the year.

FILE PHOTO: A salesman poses with a gold necklace at a jewellery shop in Jammu July 11, 2008. REUTERS/Amit Gupta/File Photo
A salesman with a gold necklace at a jewellery shop in Jammu, India. Reuters

Myth 4: ETFs don’t move the needle

Gold exchange-traded funds can have an outsize influence on the broader market -- much more than commonly assumed.

ETF vaults hold the equivalent of about two-thirds of the fresh supply mined in 2017, for example. And those tracked by Bloomberg contain more than 2,100 tonnes, worth $80 billion.

As a rule of thumb across markets, flows follow performance. That’s particularly true for precious metals, where passive allocations and bullion prices broadly move in the same direction. In every single tracked year where holdings went up, goldincreased, and vice versa. The takeaway? Dismiss the underbelly of ETFs at your peril.

Myth 5: Central banks sell gold to avert financing crunches

Finally, there’s the vexed question of whether gold sales can come to the rescue for countries with external liquidity pressures.

For years, various episodes of financial turmoil across emerging markets, and even southern Europe, have spurred speculation there could be a looming fire-sale of gold held by monetary authorities. It rarely works out that way.

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All that glisters

Big disposals risk spooking markets, and the divestiture mechanics are far from straight forward. For instance, Turkey is the 19th largest sovereign owner of gold. Yet, it’s unlikely to sell metal to ease balance-of-payments woes of late, in part because a chunk of holdings aren’t directly available for sale.

The world's top 10 biggest gold producers

1. Barrick Nevada, US

First on the list of the largest gold mines in the world is Barrick Nevada. Barrick Nevada is actually comprised of two Nevada-based mines owned by Barrick Gold: Cortez and Goldstrike. Metlas market researcher GFMS lists them together because Barrick Gold considers them an integrated operation. Combined, these two mines generated 71.9 tonnes of gold in 2017.

2. Muruntau, Uzbekistan

Muruntau is owned by the government of Uzbekistan, and officially takes the title of the second-largest gold mine in the world by production. According to GFMS, Muruntau produced 62.2 tonnes of gold last year; however, the information comes with an important caveat - details about the mine have been a longtime state secret.

3. Newmont Nevada, US

Newmont Nevada consists of a total of 11 mines and 13 processing facilities. As suggested by its name, Newmont Mining is the parent company, with many operations and projects spanning Africa and Australia, as well as North and South America. Last year it produced 49.3 tonnes.

In total, Newmont Nevada stretches over 2.6 million acres in the state and accounts for approximately 30 per cent of the company’s total global output.

4. Pueblo Viejo, Africa

Pueblo Viejo is one of the newer large gold mines in the world, and is a 60/40 joint venture between Barrick Gold and Goldcorp. The mine is located in the Dominican Republic, and its production decreased by 2.6 tonnes from 2016 to 2017, coming in at 33.7 tonnes.

5. Olimpiada, Russia

Located in Krasnoyarsk Krai, Siberia, Olimpiada is an open-pit operation owned by UK-based Polyus Gold. Olimpiada began production in 1996, and is the company’s largest operation. It holds proven and probable reserves of 30.01 million ounces of gold. The mine increased its gold output by 5.9 tonnes last year to 31.3 tonnes, amounting to a jump of about 23 per cent.

6. Lihir, Papua New Guinea

Lihir is a gold mine that was acquired by Newcrest Mining back in 2010 as the result of a merger with exploration company LGL. The mine is located on Lihir Island, and produced 28.6 tonnes of gold in 2017. The site has produced over 10 million ounces of gold since 1997.

7. Boddington, Australia

The Boddington gold-copper mine is one of the largest gold mines in Australia. The operation, situated in Western Australia, began as a three-way joint venture between Newmont Mining, AngloGold Ashanti and Newcrest Mining, but is now wholly owned by Newmont Mining. Boddington’s production decreased by just 0.4 tonnes from 2016 to 2017, coming in at 24.5 tonnes.

8. Kalgoorlie Super Pit, Australia

Next is the Kalgoorlie Super Pit, a joint venture also in Western Australia that is split 50/50 between Barrick Gold and Newmont Mining. The mine’s output saw a small decrease in 2017 over 2016, falling 0.5 tonnes to 22.9 tonnes.

9. Veladero, Argentina

This is yet another mine under the Barrick Gold umbrella. Located in the San Juan province of Argentina, the Valadero mine produced 19.9 tonnes in 2017. The mine is a joint venture between Barrick Gold and Shandong Gold Mining, split 50/50 between the two companies. The mine has proven and probable gold reserves of 79.37 tonnes.

10. Canadian Malartic, Cananda

Rounding out the list is Canadian Malartic, located 25km west of Val-d’Or in Quebec. This open-pit mine and plant were originally built by Osisko Mining. But in 2014, Osisko and its mines were acquired by Agnico Eagle Mines and Yamana Gold). The two companies share a 50/50 split.

The mine has an expected life of 11 years remaining, and approximately 90 tonnes of gold reserves. It produced 19.7 tonnes last year.