21 September 2018
Global Equity StrategyTable of contents
Gold – tarnished or an opportunity3
Why take our weightings back to benchmark.........3
1.The dollar – close to a peak3
2.Positioning6
3.Financial stress7
4.Gold holdings as a proportion of central banks' reserves are low8
5.The TIPS yield has stabilized since May but gold has fallen8
6.The threat of China ultimately opening up the monetary taps11
7.Tactically, gold is now oversold12
What about gold stocks....12
1.Valuations are clearly cheap12
2.Gold stocks are oversold12
3.Costs in some regions have fallen13
What are the risks and why are we only benchmark........14
1.Our model suggests gold is fairly valued but not cheap14
2.The gold price is expensive against other real assets14
3.The TIPS yield is low relative to trend GDP growth or profitability15
4.Gold is not cheap against other precious metals16
5.Interest rate differentials are still favouring the dollar16
Appendix....18
21 September 2018
Global Equity StrategyGold – tarnished or an opportunity
We have been bearish on gold for a number of years (see
Some tactical concerns on gold,
12 August 2016), having prior to that been much more optimistic. However, we feel that
there may well be a tactical opportunity for gold and that gold stocks have become too
cheap and thus we take our weightings in gold back to benchmark.
Why take our weightings back to benchmark
1.The dollar – close to a peak
Historically, gold has moved inversely with the dollar. The dollar trade weighted index has
appreciated by 6% YTD. We think, however, that the dollar is likely to stabilise from here.
Figure 1: The dollar and gold price tend to move
inversely
Figure 2: 12m rolling correlation between gold and
USD TWI remains very negative
-40
-30
-20
-101030
40-15
-10
-55152008200920102011201220132014201520162017
6m change, %
USD TWI
Gold bullion, rhs, inv
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
199820012003200520072010201220142016
Gold 12m rolling correlation with USD TWI
Source: Thomson Reuters, Credit Suisse researchSource: Thomson Reuters, Credit Suisse research
A strong dollar is bad for gold for two reasons:
■Despite gold being priced in dollars, 95% of consumer gold demand comes from
outside the US (predominantly India and China, which collectively account for 60% of
demand). When the dollar strengthens or local currencies weaken, it pushes up the
real price of gold for 95% of global consumers, and thus the gold price in dollar terms
needs to correct to accommodate for this.
■In addition, dollar strength often occurs when investors are more optimistic on US
growth, which (as shown later in this report) drives up real bond yields and in turn
pushes down the price of gold.
21 September 2018
Global Equity StrategyFigure 3: More than 80% of gold demand comes
from jewellery and investment, which are price-
sensitive…
Figure 4: …and 85% of consumer demand (jewellery
and investment) comes from EM
Jewellery
53%
Technology
8%
Investment
30%
Central banks
& other inst.
9%
World Gold Demand
Tonnes of gold
demanded in 2017
% of total annual
demand
Developed Markets
45615%
-US1605%
-Europe2669%
-Other301%
Emerging Markets
2,50485%
-China1,01334%
-India76326%
-Middle East2368%
-Other49217%
Source: World Gold CouncilSource: World Gold Council, Credit Suisse research
We think there is a high probability that we have seen most of the dollar strength for the
following five reasons:
i.Historically, dollar bull markets have never lasted for more than seven years. If we
are in the continuation of the dollar bull market that started in May 2011, then we
would already be in the eighth year of the bull market.
Figure 5: Dollar bull markets historically have tended to last 6-7 years
60
70
80
90
100
110
120
130
140
150
160
1975197919841989199419982003200820132018
Trade weighted US dollarFirst Fed Rate hike
10 yrs
-47%
6 yrs
+67%
7 yrs
+42%9.5 yrs-39%5.5 yrs43%
Source: Thomson Reuters, Credit Suisse research
ii.A bull market is unlikely to be sustainable with a forecasted twin deficit of 8.4% of
GDP next year and net foreign debt of 40% of GDP.。