Economic growth risks… The Fed is worried that the Ukraine crisis may increase inflation and slow economic growth. While inflation in the US continues to hover at the highest level in the last forty years, the Fed's priority is to prevent inflation from settling. This story was predominant before the Ukraine crisis, but the risks have come to the point where they both threaten growth and overheat inflation. This inflation effect is likely to be fueled by both food and energy and will have a much longer lasting effect.
Gold/copper ratio… At this point, possible correction movements in the ratios may also provide important long-term opportunities for positioning. Gold is considered one of the safest assets by investors. As such, it tends to perform well overall in times of economic and geopolitical distress, making it a leading indicator of fear.
The gold/copper ratio is calculated by dividing the market price of gold by the market price of copper. Copper is an industrial metal and the high demand for it indicates that the economy is in a growing trend. The different uses of copper and gold have allowed the ratio of copper and gold to act as an accurate barometer of global growth. The fact that gold is more positive than copper causes the rate to rise, which indicates that the global investor's appetite for risk is low. The decline in the gold-copper ratio can be seen as a sign that future economic growth expectations are rising. When we look at the 30-year gold/copper ratio graph on the Bloomberg terminal, it is observed that the economic recession in the market increased during periods of increase, while the economy performed well during periods of growth. The current decline in the ration despite the foggy economic outlook is related to the endangerment of the commodity supply. It can be said that gold remains cheap compared to the industrials in this risk mode.
Gold and copper ratio.. Source: Bloomberg
Central bank reserves… Central banks deposited 463 tonnes of gold in 2021, 82% higher than the 2020 total, pushing global reserves to the highest level in nearly 30 years. Purchasing pace slowed in the second half, with a 22% year-on-year decline in the fourth quarter. Russia's gold reserves currently account for 18% of its total reserves. The Central Bank of Russia has been strategically buying gold for a long time. As foreign exchange reserves are not available at the moment, gold remains as a theoretical reserve that can be sold. However, these reserves may be sold to the domestic market due to sanctions.
Annual net purchases by central banks in tonnes… Central bank gold demand recovers from a decade low in 2021… Source: Metals Focus, Refinitiv GFMS, World Gold Council
Since gold is seen as a hedge, it can be assumed that the Central Bank assumes that geopolitical risks will increase and gold prices will rise. From time to time, gold stands out in any war situation, as the precious metal has the most up-to-date international standard as a store of value. As a result, gold is a strategic reserve holding tool. While it is more appropriate to increase gold reserves during inflation, it may be more appropriate to decrease reserves during periods of low inflation. Otherwise, Central Banks cannot benefit from the opportunity cost of money. But in general, there is no such assumption. It may vary according to the bank's own policy.
Conclusion? The wide buying range in 2021 showed that there is still a significant appetite for gold as a reserve asset. Numerous emerging market central banks have bought gold. While central banks continue to be positive about gold, roughly the same number of central banks is expected to buy gold compared to last year. The performance of gold in times of crisis has become the number one reason why central banks hold gold. Central banks have also been entering unconventional asset classes in recent years. It is very difficult to see clearly how supply and demand will be affected in such macroeconomic uncertainties. While economic shocks and supply disruptions will cause an increase in almost all commodity groups, the upward pressures on inflation will increase the demand for hedging positions.
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