World Gold Council: 'Increasing risks are beneficial for gold'

Gold prices have fallen over the past six months due to a stronger dollar. The precious metal is also under pressure from rising interest rates, making bonds more attractive again. Despite this, according to the World Gold Council Interesting to own precious metals. In this way, gold proves its added value in times of falling stock prices and declining liquidity.

The World Gold Council refers to the latest Global Financial Stability report by the IMF, which identifies various risks to the global economy. It states that emerging markets are under increasing pressure due to rising interest rates, a flight of capital to the dollar. According to the IMF, if emerging economies such as China, Turkey and Argentina run into problems as a result, this could also have a negative impact on the global economy.

To date, the economic problems have been confined to a number of emerging countries, as the developed economies seem to be improving. The World Gold Council notes that the U.S. stock market is currently very high from a historical perspective, while the trading volume continues to decline.

Gold price under pressure due to strong dollar (Source: WGC)

U.S. equities relatively highly valued (Source: WGC)

Gold vs Stocks

Measured by the revenues of listed companies over the past ten years, shares are now relatively 'more expensive' than before the stock market crash of 1929, while the precious metal has actually become cheaper at the moment. In the scenario that stock prices fall, it can be lucrative to have some gold in the portfolio because the precious metal has a negative correlation with stocks.

Last week, the stock markets fell a few percent, while the Gold price went up a few percent during this period. The precious metal appears to be a safe haven in times of falling share prices and could therefore be interesting at this time. The chart below shows that gold benefited from the turmoil on the stock markets between October 10 and 12.

Gold price rose after stock market correction (Source: WGC)

Negative market sentiment

According to the World Gold Council, the precious metal has also become interesting for another reason. For example, asset managers' short positions on the gold futures market have risen in recent months to the highest level since 2001, which means that asset managers are still anticipating a further decline in the gold price.

This short position can be explained by the fact that gold's momentum has clearly been downward in recent months. At the same time, this can also be a contrarian indicator because the market always bottoms when sentiment is at its most negative. If sentiment reverses, it could trigger a new rally in precious metals.

Asset managers are currently quite negative on gold (Source: WGC)