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WGC demystifies gold with new valuation tool for investors

Kitco News

(Kitco News) - Investment in the gold market hit record levels in 2019 as investors searched for safe-haven alternatives. Looking ahead, the World Gold Council (WGC) is hoping a new web-based tool will lead to further investment growth as investors now have a method to fully value the precious metal.

Juan Carlos Artigas, Director of Investment Research at the World Gold Council

In a telephone interview with Kitco News, Juan Carlos Artigas, Director of Investment Research at the WGC, said that although investment demand is expected to remain strong in an environment of low bond yields, there are still hurdles the market faces when it comes to being embraced by major investment firms and portfolio managers.

Investment funds and managers tend to shy away from raw commodities like gold because it is difficult to fully value.

“Often time, investors find gold supply and demand unpredictable or they feel that gold has completely different behavior that they necessarily don ’t understand,” said Artigas. “However, that doesn ’t mean that you can ’t value gold, you just have to use a different methodology.”

To remove this hurdle in the marketplace, the WGC created Quarum, which uses an academically validated Gold Valuation Framework to measure the precious metal ’s long-term performance in different economic environments.

Although the gold market is diverse and complex, Artigas said that despite all the different factors ultimately gold ’s performance can be valued based on supply and demand fundamentals.

“Valuing gold is probably more intuitive than valuing many other assets because the market is going to respond to supply and demand,” said Artigas.

The most significant issue for the gold market is its dual nature between physical demand and investment demand. For example, positive economic growth can increase jewelry demand in the gold market but if the expansion occurs in a low risk environment then investment demand could take a hit.

At the same time, jewelry demand is linked to price and tends to shrink in a high price environment, Also, higher prices can create momentum in the marketplace, leading to higher investment demand.

Even on the supply side, Artigas said that factors like gold recycling can be calculated in Qaurum ’s framework.

“You need to disentangle the impact of consumption demand into price versus the impact of investment demand into prices,” said Artigas. “We have enough historical data to test this dual nature of gold.”

Specifically, the online tool ’s valuation framework measures all the factors driving gold ’s supply and demand and is able to calculate how the prices can react to hypothetical scenarios.

Gold investors using Qaurum can either use the WGC ’s independent macroeconomic forecasts or put in their own forecasts. The WGC has partnered with Oxford Economics, which provided different economic scenarios like a potential recession.

The valuation framework shows that gold would have an implied 5-year Compound Annual Growth Rate of 8% if the U.S. fell into a recession and the Federal Reserve was forced to cut interest rates below the zero-bound level.

In a global slowdown, in which economic growth slows to 2.8% this year, gold’s five-year CAGR is forecast to be 4.4%.

Artigas said that Qaurum now transforms the gold market into a fully valuable asset class, which means that portfolio managers no longer have to make “gut decisions.”

“This is giving you the tool to properly understand how gold is interacting with economic conditions and is not just a conversation that feels very abstract,” he said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.