How does the gold price compare to other macroeconomic indicators? Introductory comments to Session 2 John Gault The following contribution formed part of the Chatham House Gold Taskforce s investigation into what role gold could play within the international monetary system, which was developed through a series of consultations and workshops. The views expressed are the sole responsibility of the individual Gold Taskforce contributor(s) and do not reflect the views of Chatham House staff, associates or Council. Nor do they necessarily reflect the agreed views of the Gold Taskforce itself, as expressed in its final report.
What are our objectives? We wish to improve the International Monetary System because, in a world of open trade and capital flows, a smoothly functioning IMS is essential to global economic welfare. Welfare could be measured in terms of higher per capita incomes, optimized resource allocations (labor, capital, nature), enhanced economic security, reduced poverty, etc. 2
How can an IMS contribute to these objectives? A well functioning IMS should: Facilitate international trade in goods and services Facilitate international capital flows Promote balancing of persistent trade imbalances Ensure adequate liquidity for these needs, but not so much as to contribute to inflation Reduce the need for national foreign exchange reserves Share equitably the costs and burdens of the IMS among beneficiaries 3
The present IMS has proven inadequate - Trade imbalances are large and persistent - Exchange rates are slow to adjust and have failed to close these imbalances - Many economies, especially in the OECD, are operating below their capacities - Some central banks are accumulating significant foreign exchange assets - Some central banks are accumulating gold, indicating that at least certain other assets are considered inadequate 4
Some arguments often made for holding gold Gold is a hedge against declining values of fiat currencies Gold is a hedge against inflation Gold is counter cyclical In addition, some would argue that gold prices are a good proxy for other macroeconomic variables, and therefore should be preferred as an indicator or measure of global economic overheating or underperformance. 5
How useful is gold as a proxy indicator of global economic overheating or recession? In some time periods, gold prices are correlated with other commodity prices. However, commodity prices in general are not considered leading economic indicators. Typical leading indicators are orders for durable goods, housing starts, consumer and business confidence surveys, hours of work or stock market prices. Gold prices do not appear to be correlated with these and other macroeconomic parameters. 6
Gold vs. GSCI *S&P GSCI (Goldman Sachs Commodity Index) Monthly data, 1/1991 9/2011 Coefficient of correlation = 0.862 7
Gold vs. Primary Metals Index *IMF Primary Metals Index, 2005 = 100 Monthly data, 1/1990 9/2011 Coefficient of correlation = 0.914 8
Gold vs. Silver prices *World Bank GEM Monthly data, 1/1970 9/2011 Coefficient of correlation = 0.878 9
Gold vs. Brent crude oil prices *US DOE EIA Brent crude oil price Monthly data, 1/1990 9/2011 Coefficient of correlation = 0.867 10
Gold vs. Index of real food prices *FAO real food price index, 2002 2004=100 Monthly data, 1/1990 9/2011 Coefficient of correlation = 0.916 11
What sorts of parameters would someone managing IMS liquidity want to watch? Rates of inflation Industrial output and real GDP growth Global trade volumes Stock market prices Unemployment rates Housing starts and housing prices Surveys of consumer and business confidence 12
Gold vs. US consumer price index *US Bureau of Labor Statistics All Urban Consumers, 1982 84 = 100 Monthly data, 1/1990 8/2011 Coefficient of correlation = 0.749 13
Gold vs. Eurozone consumer price index *Eurostat HICP, 2005 = 100 Monthly data, 1/1996 9/2011 Coefficient of correlation = 0.870 14
Gold vs. Industrial production *OECD Index of Industrial Production 2005 = 100 Monthly data, 1/1990 7/2011 Coefficient of correlation = 0.499 15
Gold price index vs. world trade World Trade Organization Indices, annual 1978 2010, 2005=100 Coefficients of correlation with gold price: Trade Value 0.755, Trade Volume 0.624 16
Gold prices do not appear to be a consistent indicator of GDP growth Source: IMF WEO database 17
Gold vs. S&P 500 stock price index *Standard & Poors Index of 500 equity prices, 1941 43 = 10 Monthly data, 1/1990 9/2011 Coefficient of correlation = 0.313 18
Gold vs. US housing prices *S&P / Case Shiller housing price index 20 City Composite, 1/2000 = 100 Monthly data, 1/1990 7/2011 Coefficient of correlation = 0.492 19
Gold vs. US unemployment rate *US Bureau of Labor Statistics Monthly data, 1/1990 9/2011 Coefficient of correlation = 0.686 20
Gold vs. U.S. Consumer Sentiment Index *Thompson Reuters U. of Michigan Consumer Sentiment Index, 1Q69 = 100 Monthly data, 1/1978 3/2011 Coefficient of correlation = 0.478 21
Gold vs. German Business Climate Index *IFO Business Climate Index 2005 = 100 Monthly data, 1/1991 9/2011 Coefficient of correlation = 0.380 22
Gold vs. Japan Consumer Confidence Index *Economic & Social Research Institute Cabinet Office Monthly data, 3/2004 9/2011 Coefficient of correlation = 0.546 23
Tentative conclusions In some periods, gold prices may be a good proxy for some other commodity prices. However, other commodities prices are at times influenced by factors that have little or no impact on gold prices. Moreover, as a general guide for adjusting IMS liquidity, gold is rarely a good proxy for key macroeconomic parameters. 24
Is oil market behavior relevant to our understanding of gold? Oil markets are affected by geopolitical shocks (1973, 1979, 1990) Powerful players sometimes influence, or try to influence, prices (OPEC, IEA) Benchmark prices are based on an extraordinarily small number of physical transactions Short term supply and demand are extremely inelastic price changes cause little or no volume response; a wide range of prices may be market clearing Oil prices increasingly respond to expectations, and particularly to expectations about economic growth, rather than to short term fundamentals 25
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Oil price changes, unlike gold price changes, are increasingly correlated with GDP growth Source: IMF WEO database 27