Although the Bretton Woods system has collapsed for 49 years and the dollar has long been decoupled from gold, the monetary property of gold has not been lost, and gold is still a globally recognized "hard currency". At present, gold is still a very important part of foreign exchange reserves in the balance sheets of central banks.
There are many theories of exchange rate pricing, among which the theory of interest rate parity is the easiest to quantify. Interest rate parity refers to the phenomenon that the appreciation (depreciation) of one currency against another will be offset by changes in interest rate differences. According to the theory, if there is a difference in interest rates between the two countries at the same time, investors can use arbitrage to earn the spread, and the exchange rate between the two countries will change as a result of this arbitrage until the arbitrage space disappears. The formula of interest rate parity can be simply described as: the change range of local currency exchange rate = domestic interest rate-foreign interest rate, that is, the difference between domestic interest rate and (lower) foreign interest rate is equal to the expected depreciation (appreciation) of domestic currency.
Since holding gold does not generate interest, the rate of return on holding gold can be zero, but holding dollars can generate interest by depositing in the bank. When interest rates rise in the dollar, gold becomes less attractive and the price of gold falls, and vice versa. At the same time, it is important to note that there is inflation in any currency, which will offset some of the gains.
The real yield of 10-year US Treasuries is most closely related to the gold price.
There is often a deviation between theory and reality, so data is needed to verify whether there is a real interest rate parity relationship between gold and the dollar. Because the real real interest rate cannot be calculated, but there are inflation-indexed Treasurys in the US bond market, which can reflect the market expectation of the real interest rate. Therefore, the real yield on US debt can be used as the expectation of the real interest rate.
By comparing the real yield of US bonds with different maturity and gold price, the relationship between the real yield of 10-year US debt and gold price is the closest, and the correlation between them is the strongest. Therefore, the author uses the 10-year US bond real yield and gold price data from 2003 to the present to carry on the regression analysis.
The difference between the real return of 10-year US Treasuries and the gold price is less than $200 / oz most of the time, and there is an autocorrelation. Starting from this simple model, we can quantitatively analyze whether the valuation of gold may be on the high side or on the low side.
As of January 25, the yield on US 10-year inflation indexed Treasurys was-0.63 per cent, and the gold price calculated by the model should be $1725.27 per ounce, while the actual spot gold price in London was $1847.30 per ounce, with a difference of $122.03 per ounce. From the historical data, this difference is not high, but considering that the residual term itself has the characteristic of autocorrelation (that is, the difference between the real value and the fitted value over a period of time converges), the difference is still negative until January 2022, and the gold price may be overvalued at present.
According to the observation of the data from 2003 to the present, it can be found that the period when the difference between the actual price of gold and the fitting price is positive is usually the late stage of Fed monetary tightening and the early stage of easing, while when this difference is negative, it is usually the late stage and early stage of Fed monetary easing, while the current Fed policy is still in the late stage of easing, and the monetary tightening process has not yet officially begun, and this difference has changed from positive to negative, from a historical point of view. It is also slightly unusual, and the actual gold price tends to be overvalued.
Macro events are difficult to explain the differences between US bonds and gold markets.
Judging from the recent market changes, there are several supporting factors in gold prices.
First, the Fed's rate hike does not support the monetary nature of gold. Fed officials have expressed an overall "hawkish" attitude. Fed Chairman Colin Powell has previously said that the Fed will stop the persistence of high inflation, will end asset purchases at the end of March, may shrink the table later this year, and will shrink the table faster. In addition, Fed officials Mestre, Barkin and Huck all expressed support for raising interest rates in March. The market expects the fed to raise interest rates by 25 basis points in march with a probability of 81.3%, which is the main reason for the rise in real yields on u.s. bonds.
Secondly, from the perspective of risk aversion, the recent conflict between Russia and Ukraine has not yet triggered a wide range of market demand for risk aversion, mainly because TED spreads are low as a whole and there is no widespread risk aversion sentiment in the international market. Recently, the global equity assets have fallen significantly, and the sharp fall in US stocks will reduce the market risk appetite, give full play to the function of gold as a "safe haven", and gold prices should also be supported to a certain extent.
Finally, since January, the US has released generally poor economic data, including a rebound in first-time jobless claims, a decline in retail sales data and a sharp drop in the New York Fed manufacturing index, with gold's commodity properties under pressure. Although the US inflation data for December are still high, the US bond market shows that inflation expectations have been significantly weakened and that inflation is difficult to become a factor driving gold prices higher. However, silver, which has a stronger commodity attribute recently, has increased more obviously, and the price ratio of gold and silver has shown a downward trend, which is slightly contradictory to the situation reflected by the actual economic data.
In short, the fundamental factors supporting this round of gold price rise are slightly insufficient, and strong price support factors can not be seen from the recent fundamental changes. The author believes that the rise in the real yield of US bonds can better reflect the fundamentals, while the price of gold deviates from the true value in the short term, and the price of gold may have more room to fall in the future.
Author: Wang Yanqing
