Final-Oxford-Economics-Report-010711（通胀与紧缩对黄金的影响）

The impact of inflation and deflation on the case for gold A report commissioned by the World Gold Council July 2011 Contents Foreword ................................................................................................... 1 Executive Summary.................................................................................. 2 1 Introduction ..................................................................................... 3 2 Determinants of the price of gold ................................................... 5 2.1 The distinctive properties of gold ............................................................... 5 2.2 Gold and the general price level ................................................................ 5 2.3 Gold and real interest rates ........................................................................ 7 2.4 Gold and the US dollar ............................................................................... 8 2.5 Gold and financial stress ............................................................................ 8 2.6 Gold and political instability ...................................................................... 10 2.7 Gold and official sector activity ................................................................ 11 3 Modelling the price of gold ........................................................... 13 3.1 Estimation of a gold price equation .......................................................... 13 3.2 Decomposing two key historical periods .................................................. 15 3.3 The drivers of the price of gold going forward.......................................... 16 4 Alternative inflation scenarios ...................................................... 17 4.1 Introduction .............................................................................................. 17 4.2 Baseline scenario ..................................................................................... 18 4.3 Deflation ................................................................................................... 21 4.4 Stagflation ................................................................................................ 24 4.5 High inflation ............................................................................................ 27 5 Gold in an efficient investment portfolio ..................................... 30 5.1 Introduction .............................................................................................. 30 5.2 Optimisation results .................................................................................. 31 6 Conclusion ..................................................................................... 36 7 Appendix – equation details ......................................................... 37 The impact of inflation and deflation on the case for gold July 2011 1 The impact of inflation and deflation on the case for gold July 2011 1 Foreword Two crises, unprecedented central bank intervention and deep and prolonged recessions, followed by a brittle recovery have left the global economy facing a complex inflation/deflation paradox. For many developing economies, high inflation is an ongoing reality, while the threat of protracted low growth, low inflation or even deflation looms over developed markets, fuelling uncertainty for investors and savers. The World Gold Council has therefore commissioned Oxford Economics to conduct this independent, proprietary research using their respected Global Model, to explore the performance of gold and other assets in various economic situations and examine gold‟s role within in an efficient investment portfolio in divergent economic scenarios. This research from Oxford Economics makes a valuable contribution towards the World Gold Council‟s own fundamental research for investors, supporting the findings from recent reports on gold as a tail risk hedge and gold versus the broader commodities complex, which can be found at www.gold.org. The impact of inflation and deflation on the case for gold July 2011 2 Executive Summary  Since 2007 the world has seen a period of considerable economic and financial volatility, during which gold has performed strongly with its price more than doubling. This performance has prompted some reappraisal of gold‟s properties as an investment vehicle.  Over the very long-term gold tends to hold its value in real terms, but short-run factors can move gold away from its long run equilibrium for extended periods. These factors include financial stress, political turmoil, real interest rates, inflation, central bank activity and the US dollar exchange rate.  To begin our investigation into gold, we estimate an equation to explain gold price movements over the 1976-2010 period. The modelling approach suggests that all of the factors outlined above are significant short-run influences on the gold price and that shocks to the gold price tend to wear off relatively slowly. The equation also highlights the fact that whilst the current price of gold is comparatively high, the adjustment back to equilibrium could take place via a rise in the general price level, rather than a fall in the nominal value of gold.  Using the estimated equation and Oxford Economics‟ Global Model, we examine the performance of gold relative to other assets from 2011-2015 over a number of variant economic scenarios. We find that while other assets outperform gold in the baseline scenario, gold performs relatively strongly in a high inflation scenario and also does comparatively well in a deflation scenario derived from a wave of defaults in the „peripheral‟ eurozone countries. This is because such a deflation scenario includes a sharp rise in financial stress.  The scenario analysis confirms gold‟s properties as a hedge against extreme events; properties that may be especially valuable given the considerable uncertainties still facing the world economy.  The study then goes on to examine gold‟s place in an efficient investment portfolio using optimisation techniques and different assumed long-run returns for gold, equities, bonds, cash and property. We find that because of its lack of correlation with other financial assets, gold has a useful role to play in stabilising the value of a portfolio even if the conservative assumption of a modest negative real annual return is made.  We find gold‟s optimum share of a portfolio to be around 5% in a base long-term case for the UK featuring 2.25% growth and 2% annual inflation. This is higher than levels found in typical mainstream investment portfolios, although this may be in part because the analysis does not include other assets such as index-linked bonds, foreign securities and other commodities.  Varying the economic assumptions can imply higher allocations for gold. Gold‟s optimal share rises in a more inflationary scenario, as well as for more risk-averse investors in a limited growth and lower inflation scenario, thanks to its low correlation with other assets. The impact of inflation and deflation on the case for gold July 2011 3 1 Introduction Since 2007 the world has seen a period of striking economic and financial volatility, featuring the deepest recession since the 1930s and steep declines in the value of many financial assets – both traditional ones such as equities and newly developed ones such as mortgage-backed securities. Against this background, however, gold has performed strongly with its price roughly doubling since the global financial crisis began in mid-2007. Gold‟s performance in this period has sparked something of a reappraisal of its characteristics as an asset and led some to revisit its proper place in investors‟ portfolios. As a store of value which is relatively immune to inflation, financial crises and credit default, gold has been used for centuries to protect individuals‟ wealth. These special properties are borne out in the recent performance of gold, and investors may continue to value them given the significant uncertainties still facing the global economy. At the time of writing, the world economy faces concerns over sovereign creditworthiness, the impact of loose monetary policy including quantitative easing on medium-term inflation, and the possible effects of unrest in the Middle East on global oil markets. There are also longer-term structural issues looming large such as the future of the US dollar as a reserve currency and the ongoing shift in the balance of economic power and wealth from the western „developed‟ countries to the rapidly growing emerging economies such as China and India. The purpose of this study is to examine in detail gold‟s properties as an asset and its likely performance relative to other assets in a variety of different economic scenarios. By building on existing studies of the determinants of the gold price and combining this with our own quantitative analysis in the framework of the Oxford Global Macroeconomic Model, we have examined in detail gold‟s properties as an asset and its likely performance relative to other assets in a variety of different economic scenarios. The ongoing uncertainty surrounding many aspects of the global economy (as noted above) makes it especially appropriate that a wide range of alternative scenarios be covered. We seek to test gold‟s resilience as an asset in the face of possible shocks including high inflation, financial crises and deflationary conditions and also seek to assess its proper place in a long-run investment portfolio under different economic conditions. The paper is organised as follows. In Section 2 we look at the key determinants of the gold price, using historical analysis. In Section 3, we present a model that explains movements in historical gold prices, investigate the key drivers of the price of gold (in both the short run and long run) and estimate an equation to explain movements in the gold price over the recent past. Section 4 combines the newly estimated equation with the Oxford Global Macroeconomic Model to compare the performance of gold and other financial assets (cash, equities, gilts and property) in a variety of possible scenarios incorporating different inflation outlooks. Our scenario analysis considers four possible outcomes: (i) a baseline featuring a gradual recovery in the global economy with comparatively low rates of inflation, (ii) moderate deflation, where a eurozone sovereign debt crisis triggers a second global recession leading to deflation, (iii) stagflation, and (iv) very high inflation, where inflation rates approach 10% in the developed world. Our scenario selection is designed to cover possible futures for the global economy that incorporate some of the currently identified major risks to the global economy. Finally, in Section 5 we use optimisation techniques to examine how gold might best fit into a benchmark investment portfolio given its particular characteristics and the range of possible future scenarios for the global economy. We elaborate three different long-term scenarios (baseline, higher inflation and low growth low inflation), and using assumptions about long-term asset returns and volatility we examine how gold‟s place in an efficient portfolio varies across the different scenarios. This section is constructed from the perspective of The impact of inflation and deflation on the case for gold July 2011 4 a UK investor in order to utilise the long run of historical asset returns data (going back to 1971) available for the UK. Section 6 presents a short conclusion. The study and its results are subject to some limitations. Although the methodology used in this study was quantitatively rigorous, the approach taken to modelling the price of gold and constructing the scenarios was macroeconomic. As a result, the key drivers of the price of gold in the equation are macro variables, such as economy-wide interest rates and financial stress, rather than micro level variables of supply and demand, such as the mine supply of gold. 1 In addition, the optimisation analysis utilises a relatively simple model, which does not include all possible financial assets, allow for all possible constraints investors may face, or cover all the possible motivations and characteristics of investors. As such, the results are intended to be largely illustrative, outlining gold‟s special properties as an asset, examining gold‟s likely relative performance against other assets in changing economic circumstances and indicating the course that investors‟ allocations to gold might best take under different economic scenarios. 1 From a modelling perspective, using the macroeconomic approach means that we are unable to fully account for how micro developments, such as an increase in the cost of mining, will impact the price. Coupled with this it seems likely that increasing demand in the Far East and rising production costs will have a significant positive impact on the price over the medium term, which we are not able to fully capture in our model. The impact of inflation and deflation on the case for gold July 2011 5 2 Determinants of the price of gold 2.1 The distinctive properties of gold Gold has been used as a store of value and form of currency since ancient times. Since the seventeenth century it has been formally traded over the counter in London and by the nineteenth century it underpinned the largest fixed exchange rate system the world has ever known (the Gold Standard). In the twentieth century it was again used as the backbone to a formal exchange rate mechanism (Bretton Woods) but the collapse of the system in the early 1970s left the price to float freely for the first time in over 250 years. Gold‟s historical popularity as a currency and a store of value has sprung in part from a number of peculiar properties not fully shared with competing assets. In contrast to other commodities, gold does not perish or degrade over time, giving it unique properties as a very long-term store of value. Gold mined today is interchangeable with gold mined many hundreds of years ago. The supply of gold has also been relatively fixed for the last century, with annual mine production a small share of the total stock of gold outstanding and with a limited ability for annual production to rise in response to changes in the gold price. This marks it out from other commodities where substantial supply responses to price changes are possible, at least over the medium term. Another important attribute of gold is its relatively less prominent use for industrial purposes, compared to other commodities including precious metals such as silver and platinum. Only around 10% of gold demand in 2010 came from such industrial uses 2 with the balance coming from jewellery and investment demand. As a result, gold prices lack the strong link to the economic cycle that other commodities have and gold has thus often exhibited low or even negative correlations with these and other financial assets. 3 Gold is also unusual among financial assets in not delivering a yield, e.g. a dividend or coupon as paid by equities and bonds and this can be seen a disincentive to hold gold; however, gold has a significant advantage compared to some other financial assets which is its lack of default risk. These factors give gold an unusual set of behavioural characteristics compared to other financial assets, which will be examined in more detail below. 2.2 Gold and the general price level Despite the many different institutional settings (such as the Gold Standard, the Bretton Woods system and from 1971 a free floating price for gold) and the migration of gold from use as an everyday currency to an investment vehicle, the long run purchasing power of gold has remained remarkably stable over time. 4 In the 1830s the price of gold in 2010 dollars was around US$450 per troy ounce, with the real terms price much the same in 2005, more than a century and a half later. 2 „Gold Demand Trends‟ 2010 Q3 . World Gold Council 3 See C. Lawrence (2003), “Why is gold different from other assets? An empirical investigation”, Report for the World Gold Council. 4 See for example R.W. Jastram (2009) The Golden Constant: The English and American Experience, 1560-2007, Edward Elgar Ltd and E.J. Levin & Wright, R.E. (2006) “Short-run and long-run determinants of the price of gold”, Report for the World Gold Council. The impact of inflation and deflation on the case for gold July 2011 6 The tendency for gold to hold its real terms value over long periods has often led to gold being described as an „inflation hedge‟. However, the reality is more complex as the gold price does not simply move in line with the general price level but rather exhibits long periods where it moves without any apparent link to inflation trends. For example, in the early 1980s the real price of gold leapt to over three times its very long-run average, while the 1990s saw a lengthy bear market which saw the gold price fall well below its long-term average. Chart 2.1 – Gold price in the long run Chart 2.2 – Real gold price The link between gold and inflation is also obscured to some extent by structural changes in the gold market. For much of the 19 th century the gold standard kept the nominal price of gold fixed for extended periods. After World War II, the Bretton Woods exchange rate system also retained a gold link to the value of the US dollar, which again meant that gold prices were not free to react to the interplay of supply and demand. Only after the abolition of this system did something like a true free market for gold come into being. Notably, the average real price of gold since 1971 is much higher than it was in the preceding 150 years (around US$650 in 2010 prices versus US$475) which strongly indicates a major structural change in the market over the last forty years. Currently, the gold price stands well above its post-1971 real terms average but recent history cautions us against assuming a rapid reversal in the price. The early 1980s experience shows that gold could yet peak significantly higher than current levels. Moreover, gold prices were above their post-1971 real terms average for almost all the 1978-1990 period, while in the current bull market prices have only been clearly above this level since 2007. It is also possible that while gold‟s real price eventually falls back this takes place not by a fall in the nominal gold price but by a substantial rise in the general price level, that is that the current price proves an accurate warning of high inflation down the road. The strong performance of gold during the inflationary 1970s and early 1980s confirms its potential value in periods of rapid price rises. Less clear, however, is how gold might fare in a period of prolonged price deflation. This is because periods of general price deflation are rare. In the last 150 years, the only examples are the Great Depression of the 1930s and the nineteenth century Great Moderation. Moreover, the gold price was fixed for the majority of both periods due to the operation of the Gold Standard. Examination of the behaviour of other commodity prices suggests that had gold been freely floating, its price wou