Hi YXI friends,

Today, we are talking about Gold. Gold is a very unique asset because of its dual nature of being a commodity and a monetary asset.

In the first half of this article, we look at the above-ground stocks, mining locations, and the supply-demand factors of Gold.

In the latter half of the article, we explore how Gold, as an investment or financial asset, behaves according to the macro environment, seasonality.

Finally, we analyse Gold and GLD’s price charts, with both long-term and short-term outlooks.

Let’s dive in!

Content guide (you can click ahead when viewing on a browser)

Section 1: Gold’s above-ground stock, top Gold producers, Supply vs Demand factors, hedging Inflation, Central Bank reserves

Section 2: Recent central bank buying, ETF demand, trading Gold futures, Impact of interest rates

Section 3: Price analysis and outlook.

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. There is not actually that much Gold above the ground

Gold has played an important role as a medium of exchange, store of value, and symbol of status throughout history. However, it might surprise you that only 213,000 tonnes of Gold have ever been mined, and most of it within the last century. If that sounds like a big number - lets visualise this: all of the Gold ever mined can be fitted into a 23m x 23m cube.

Almost half of Gold’s above-ground stock is used for jewellery. Global central banks hold about one-fifth. And another one-fifth is circulating as bars and coins. Gold ETFs actually represent a tiny fraction of the total stock.

Between 2010 and 2023, the above-ground stocks of Gold grew by 26%, or 1.8% annually. In the same period, the US M2 monetary supply has nearly tripled from $8 trillion to $21 trillion.

2. China, Russia, and Australia are the top Gold producers

Currently, China lead the Gold production, ahead of Russia and Australia. A sizeable chunk of global mining is also done in North America, South America, and Africa.

3. Gold’s shifting supply & demand over time

There are two main drivers of Gold’s supply: Mining (73%) and Recycled Gold (26%). Miners also may hedge (1%) and de-hedge by releasing gold from existing stock to the market or reducing the gold available to the market.

On the demand side, Gold flows into a variety of industrial and investment activities. Not only is Gold used to make jewellery (31%), it is also consumed in hardware technology (6%) across electronics and dentistry.

As an investment, Gold is mostly bought as bars and coins (20%). The global central banks have been ramping up their purchases in the past 3 years, now taking up nearly 14% of the Gold demand. ETFs actually represent a remarkably tiny fraction of the total Gold demand.

4. Is Gold an inflation hedge?

In our latest webinar, we discussed how oil is closely correlated with not only the realised inflation (e.g. the CPI), but also the forward inflation expectations (observed through 5Y5Y Breakevens).

Here is a chart of the YoY change in oil prices versus CPI prints. You can see a general pattern of positive oil price changes being associated with higher CPI prints.

What about Gold? Gold has been globally recognised as a store of value due to its scarcity and immutable nature. Does it mean it’s also an excellent inflation hedge? Check out the equivalent chart for Gold vs inflation below.

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