Blog Posts — March 26, 2019

Who Wins and Who Loses, if Gold Keeps Rising?

by Diana R. Baechle, PhD

Gold prices have been rising recently as fears of a global economic slowdown returned, following the Fed’s decision last week to keep interest rates unchanged and suggesting that they may not raise rates for the rest of the year. Weaker-than-expected manufacturing data in the US and Europe added to investors’ newly-bleak view of the market, triggering a market sell-off on Friday.

Which begs the question: if gold continues to rise, as equities fall in a “risk-off” environment, who are the likely winners and losers?

Source: Federal Reserve Economic Data, Axioma

Spurred by economic uncertainty and heightened volatility, investors embraced gold for six months up to February of this year. The price of gold rose 14% from August 2018 to 20 February 2019, when it reached a near-term peak—the highest level since April 2018.

But as stocks in both developed and emerging markets rebounded this year, volatility declined, putting a damper on gold prices at the end of February. Axioma’s Developed and Emerging Market fundamental models show a year-to-date decrease of over 24% in short-horizon risk for Developed Markets (DM) and Emerging Markets (EM)1.

After a short period of decline, however, the price of gold has been rising again in the past couple weeks, even as volatility continued to fall.

Source: Federal Reserve Economic Data, Axioma

Between 2014 and 2017, both Emerging Markets and Developed Markets had negative exposures to gold2, indicating that the effect of a movement in the price of gold on these equity markets was opposite to the direction of the price move during this period. Starting in 2018, however, Emerging Markets reverted to a positive exposure to gold, which meant that, as anxious investors reached for gold, the increase in the price of gold had a positive impact on Emerging Markets, presumably concentrated among those that are gold producers. The opposite was true for Developed Markets, which still showed a negative, albeit relatively lower-magnitude exposure to gold.

By last Friday, Emerging Markets in aggregate had a large and positive exposure to gold of 0.25, which is double the median exposure over the past 10 years. Developed Markets’ exposure of -0.09 on March 22 was also close to double the -0.05 median.

Source: Axioma

In terms of individual country-level exposures, the emerging countries exhibiting the largest exposures to gold were South Africa (0.65), Peru (0.50), Qatar (0.45), China (0.37) and Indonesia (0.36). These are the countries that would have the most to gain from an increase in the price of gold. In contrast, Greece, Czech Republic, Egypt, and India are the only emerging countries that would suffer from a continued increase in the price of gold, as they displayed a negative exposure to gold.

Source: Axioma

Among developed countries, only Hong Kong, Korea and Singapore would profit if the price of gold continues to rise. Japan and the majority of European countries stand to lose the most. The developed countries with the most negative exposures to gold as of 22 March 2019 were Sweden (-0.29), Japan (-0.28), Belgium (-0.26), Ireland (-0.25), and France (-0.23).

Therefore, Sweden would likely be the biggest loser, and South Africa the biggest winner, if gold continues to climb.

Source: Axioma

The two charts below show ranges of exposure by country between January 2009 and March 2019, with the horizontal line in the box representing the median and “x” marking the mean.

Historically, Peru, Brazil, China, South Africa and Indonesia—which are among the top gold-producing countries in the world—not surprisingly showed the highest median positive exposures to gold. In contrast, the developed countries with the highest negative median exposure to gold were Japan, Switzerland, and Ireland.

These charts should help investors having a view on the direction of the price of gold benefit from tilting their equity portfolios on countries with exposures to gold that are most aligned with that view. While some of these countries may be obvious beneficiaries, the exposures of others, especially those with no obvious ties to gold as producers or consumers, may be less well known.

Source: Axioma
Source: Axioma


1This study was conducted using the Axioma Market Portfolios representing Developed Markets, Emerging Markets and the individual country portfolios.

2For assessing the sensitivity to gold, we used Axioma’s Commodity Sensitivity Macro Factor—Gold Sensitivity, which is estimated by regressing local asset returns to changes in GSCI Gold spot price index prices using a 2-year rolling window.