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A golden age for gold?

“To gold they tend,
On gold depend,
All things! Oh, poverty!”

Source: Goethe, Faust. A Tragedy, 1808. Scene VIII: Evening

The above quotation may seem somewhat out of context, but given the current monetary policy pursued by the major central banks, it is more relevant than ever. In the past two years, hardly any asset class has outperformed gold, so investment in gold is on everyone’s lips. But what drives the price of gold and does the recent correction in the all-time highs really present an opportunity to buy?

Before we answer these questions, we would first like to take a closer look at the precious metal and its history. Gold is prized for its resistance to corrosion and oxidation, among other properties. The discovery of gold is attributed to the Egyptians as long ago as approximately 6000 BC. While it is estimated that gold mining began in the Copper Age, the first objects made out of gold in Central Europe can be dated to approximately 2000 BC. Before it came to be used as currency in the form of coins for millennia in a multitude of cultures, it was initially used to make idols almost all over the world. Until 1971, when the U.S. unilaterally abandoned the gold standard, even the value of the U.S. dollar was based on the yellow metal. It is worth mentioning – and not wholly irrelevant to today’s discussion – that private ownership of gold was prohibited in the U.S. for 40 years until 1974. The total amount of above-ground stocks and below-ground reserves of gold on Earth has been estimated at approximately 250,000 tonnes¹. To date, approximately 198,000 tonnes of this has been mined. To visualise this, if it was melted down and made into a cube, each side would measure 21.7 m. At the price of USD 1,890 per troy ounce (31.103 g) on 30 September 2020, this cube would be worth USD 12.1 trillion. As a comparison, this is roughly the equivalent of the combined expansion in the balance sheets of the Fed and ECB alone in the past 12 years (approximately USD 12 trillion). Figure 1 shows how this gold is currently being used.

Figure 1: Gold usage

It is obvious that gold does not generate any cash flows and does not provide any truly measurable benefit. In fact, due to the cost of storage, owning gold generates costs; i.e. negative cash flow. So, whether you regard gold as a currency, a commodity, an asset class or as jewellery/a consumer good, at the moment there is no model to theoretically arrive at a fair price for the precious metal. Unsurprisingly, this fact is one of the main criticisms put forward by the opponent of gold and, with good reason, is deemed a flaw. That said, as long as gold continues to fulfil its role and store value, it automatically has value. The advantage of gold over fiat money as an alternative store of value and medium of exchange is, quite simply, the limited supply. Unlike conventional currencies, gold cannot simply be printed.

What determines the price of gold? Naturally, when assessing the price of gold, you have to look at the historical relationship between supply and demand. The next two figures illustrate quite clearly, that you can say that there has been a certain degree of stability on the supply side in recent years, and that the relative fluctuations on the demand side have been greatest in investment and central banks.


Figure 2: Supply of gold

Figure 3: Demand for gold

Given the actual availability in goldmine operator capacity, it is unlikely that the supply of gold will change dramatically, so sustained imbalances in this ratio can mainly be expected on the demand side; specifically, on the investment side.

This raises the question as to what this investment-side demand, and thus the price of gold, hinges on. The most obvious factor, for which there is also a very plausible explanation, is the price of gold’s dependency on real interest rates2. This is quite evident from the following chart.

Figure 4: Price of gold and yield on inflation-linked U.S. Treasuries

The reasons can be summed up as follows:

If enough market participants attribute the functions of store of value and medium of exchange to the precious metal gold and, in addition, free trade and ownership is possible, then gold must be regarded as a valid alternative to paper money. The purchasing power of money, in simplified terms, depends on the nominal rate of interest minus the inflation rate; that is, the real interest rate. Since this correlation does not apply to the “purchasing power” of gold, the price of gold – calculated in paper money – must move in inverse proportion to the real interest rate. Putting this theoretical construct into practice is then up to the broad community of investors, who, in constantly weighing up the relative attractiveness of money and gold determine the price of gold by means of their trading activities.

So, to answer the question about how the price of gold will develop in future, it is important to look at changes in the real interest rate. We know that paper money is generally controlled by independent central banks with the promise of guaranteed relative price stability. Without debating the issue of trust in relation to the central banks here – which, with some degree of probability, constitutes a future escalation scenario – the extent to which the promise of guaranteed price stability can be kept in the future must be critically scrutinised. In light of below-average growth forecasts and politically inopportune programmes of savings or tax increases, most countries are faced with chronic deficits in their national budgets. The fiscal packages to combat the ongoing Covid-19 crisis represent an interim peak in a development that has led to a level of global public debt that would be unsustainable without record-low nominal interest rates and the so-called monetisation of state debt (buying up of sovereign bonds by the central bank). With the major central banks stating that nothing is going to change in relation to the low-interest-rate environment any time soon, and the quasi-certainty that the rapid expansion of the money supply (see Figure 5) through the monetisation of state debt will be inflationary, we will be faced with further falls in real interest rates in the next few years as well. That should settle the question as to what direction the price of gold will take.

Figure 5: Growth rate in the U.S. M2 money supply

However, it is much harder to say what the absolute price will be. Considering that the developments mentioned generally happen over a prolonged period and the price of gold only recently reached a new all-time high due to the massive monetary programmes around the globe, then much higher target prices are conceivable. The next figure shows two things quite clearly. On the one hand, even in the most recent so-called gold bull runs there were interim corrections of 25% and more and, on the other hand, the price of gold, even after beating a longstanding record, still managed to double if not triple. So, of course, such price targets should not be put forward. Rather, it should be pointed out that the price of gold can rise further than is considered possible right now. This is especially true if very high inflation hits.

Figure 6: Price of gold in USD

Direct conclusions can be drawn from this for the asset allocation of our mixed funds in particular, and also for the investor in general. With a clear opinion on the real interest rate, a gold position aligned to the risk appetite must form part of asset allocation. The realisation that – especially in recent times – there has been a strong correlation between the price of equities and the price of gold to the detriment of the desired diversification effect, while not uncritical in the short term, is not relevant in the long term. In principle, it can be said that, naturally, both asset classes have benefited enormously from the fall in interest rates in the past year. This synchronism is reflected in particular in the comparison of the weekly returns of both asset classes over the past five years (see Figure 7).

Figure 7: Scatter plot of weekly return S&P500 vs gold

While there is no significant correlation over the overall period, the outlying points, all of which occurred in 2020, are strongly correlated. However, this development is not the rule and cannot be extrapolated one-to-one. In particular, if the aforementioned scenario involving a sharp increase in inflation arises – which is not foreseeable – gold will behave differently to equities in the long term. The same goes for an environment of falling equity prices, if this is not induced by movement in interest rates. In these events, one would need gold in addition to or even instead of equities.

Circling back to our quotation from Goethe, this applies to financial investment, too: on gold depend all things at the moment! One more thing to conclude, even Americans used to have the phrase written on their dollar notes, known as gold certificates “... in gold coin payable to the bearer on demand.” Of course, those days are long gone and the reference to the possibility of exchanging the note for gold has been replaced with another phrase, but it is not my place to comment on that.

¹ World Gold Council, [30 September 2020]
² In simplified terms, this refers to the nominal interest adjusted for inflation.

Positioning of the Ethna Funds


The macroeconomic environment for the eurozone remains mixed. While the manufacturing Purchasing Managers’ Index rose 2 points in September to 53.7, the figures for the services sector were surprisingly weak, falling 3 points to 47.6. The increasing divergence between the industrial and services sectors is reflected in the heightening of uncertainty and concerns about the consequences of a second wave of coronavirus infections. In the U.S. the spotlight was recently on the televised debate between President Donald Trump and his opponent Joe Biden, which was described by the vast majority of viewers as chaotic and often below the belt. Furthermore, the pre-election talk of contesting the result of the election will keep the markets on their toes beyond 3 November. We expect real GDP not to reach pre-crisis level before 2022.

Corporate bonds have remained stable despite losses in equity markets. We expect that new corporate bond issues will decline sharply in the coming weeks, since the companies, for one, have stocked up on adequate liquidity in recent months and, for another, will avoid issuing bonds into the uncertainty of the U.S. elections. As expected, the majority of new issues after the summer break will come from sovereigns and supranational organisations, such as KfW Development Bank and the European Investment Bank. While public deficits have ballooned as a result of the coronavirus crisis and the associated stimulus programmes, governments have to pay even less interest than before the crisis due to the fall in interest rates and bond purchases by the European Central Bank. At 0.86%, the yield on 10-year Italian sovereign bonds is lower than it has been for a long time and is close to its all-time low of 0.76%. At the same time, the yield on 10-year Bunds seems stuck below the -0.5% mark. The statements from ECB President Christine Lagarde before the European Parliament are likely to have had a slightly supportive effect on this. She made it clear that the central bank will up the monetary ante should the economic outlook require it.

The popularity of green bonds has increased of late. This year, around EUR 150 billion in green bonds has been issued. This is hardly surprising considering the global increase in environmental awareness. But issuing sustainable bonds also makes total sense from a corporate point of view as well because the high demand means companies can often refinance more cheaply than with conventional bonds. Only last month did the Federal Republic of Germany, an issuer rated AAA, enter the green bond market for the first time, with a Green Bund that raised EUR 6 billion. Shortly afterwards came the announcement that the EU Recovery Fund would earmark EUR 225 billion of the issuance for sustainable projects. Thus, in one fell swoop, the EU has become the biggest issuer of green bonds, which will no doubt set an example and influence other issuers. We also participated to a greater extent in the primary issuance of green bonds in September. This is not only for purely environmental reasons; initial studies have shown that sustainable bonds do better than their non-sustainable counterparts, especially in volatile market phases (for example, see Roncalli et al. (2020): One example from last month is our participation to the tune of EUR 1 million in the new Chanel issue, which is tied to sustainability targets whereby Chanel must repay a premium on the face value if it fails to meet the targets. Another example is our participation in the green bond from Verizon, who plans to use the proceeds to help build solar and wind power plants.

The Ethna-DEFENSIV (T class) lost a minimal 0.09% in September and is therefore up 1.24% in the year to date. Corporate bonds contributed slightly to monthly performance, although towards the end of the month in particular the risk premia rose again slightly for the first time in a long time. However, the price of gold has recently dropped back due to the – at least temporary – strength of the U.S. dollar and sideways movement in real interest rates and this has lately led to the marginally negative performance for the month. We reacted early to the weak price of gold and reduced the position from 10% to 4% over the course of the month, thereby increasing the cash allocation. The Ethna-DEFENSIV has lately again inspired confidence with its stable performance and adapted in time to the change in circumstances. With an average return of 2.5%, the bond portfolio is in a position to deliver stable positive returns in the future too. And to the proponents of TINA (There Is No Alternative [to Equities]), we say that there is always an alternative. In the Ethna-DEFENSIV’s case, this is to eschew an uncertain equity return in the prospect of low but stable returns in a product focused on bonds. The conservative bias of the Ethna-DEFENSIV offers a true alternative to equities, in particular considering the risks associated with the U.S. elections. At the same time, as soon as opportunities arise in the bond market we will use the higher cash allocation to put the money to work. We currently see further performance opportunities, albeit somewhat moderate, in our gold position and the Swiss franc position.


It seemed the mega tech stocks were previously able to defy gravity, but no longer. With the prices of these only going one direction for months on end, September saw the first sizeable correction since the lows of March. In the search for possible reasons, there are many arguments besides high valuations, climbing Covid-19 infection rates and an escalation of tensions between the U.S. and China. In all honesty, however, all these arguments have been valid for quite some time now. Perhaps we only need to recognise that a phase of consolidation was needed here, too, which has now occurred. This correction is exhibiting relative congruence with the USD, which is more solid once again, which raises the question of whether the dollar’s weak phase has already come to an end. We are not sure about this and therefore hold no position. It is remarkable that the rest of the equity market and the bond market in particular are relatively quiet. At least the European bond sector was supported by a decline of approximately 15 basis points in the Bund yield. In contrast, the yield on the 10-year US Treasury only fell 5 basis points. The statements made by the Fed Chair – both at the regular meeting and before the House Select Subcommittee – were not particularly helpful. His assertion that the effects of the Covid-19 crisis have not been overcome and that further fiscal stimulus is urgently needed only added to the uncertainty. But political agreement on this very second fiscal package has stalled and was further complicated by the Republicans’ swift nomination of an arch-conservative Justice of the Supreme Court. “Evil to him who evil thinks” comes to mind when an American president – who weeks before the election publicly calls into question the legitimacy of the result due to a high volume of mail-in voting – rushes to fill the vacancy on the Supreme Court with his own nominee before the election. If one thing is clear from the chaotic first televised debate between President Trump and his challenger Biden, it is that a good deal of uncertainty about the election will not only dominate the next few weeks but also will not go away on the day the U.S. goes to the polls. Incidentally, the final phase of Brexit negotiations and the reignition of doubt about the implementation of the European fiscal package is causing similar disquiet in Europe.

In light of this, we further increased the cash allocation over the course of the month by continuing to reduce the bond portfolio and by halving our gold holding to 5%. In the long term, we remain positive about the precious metal (see market commentary) but, in the short term, there is further downside potential and a very strong correlation with equity risk. In terms of equities themselves, the allocation was almost the same at the end of month as at the beginning. What it does not show is that adjustments up and down have been made in the meantime via futures positions but this is a manifestation of our flexible tactics. No change in the Swiss franc position was required. Switzerland’s rejection of the referendum on ending free movement with the EU can be seen as a positive for European integration, and our retention of this position was subject to a “no” vote.


In the context of the low/zero/negative interest rate environment and the central banks’ bountiful liquidity, equities are a smart and productive real investment at the centre of our allocation. As clearly explained in last month’s commentary, parts of the equity market (especially high-growth) were gripped by an element of investor euphoria throughout the summer and, from a fundamental point of view, simply went too far. This development seemed bound to correct, and indeed September saw a correction set in. Given that Covid-19 case numbers are rising and the U.S. presidential election is entering the final straight, the recent increase in volatility in global equity markets is likely to remain with us in October as well. Nevertheless, the sometimes dramatic price falls in September present an attractive opportunity to top up the equity allocation. We systematically took advantage of this environment to further stock up on select single stock positions, but especially to markedly reduce the existing hedges over the course of the month. Thus, gross equity exposure at month-end increased to 70% (vs 67% in the previous month) and net equity exposure to 63% (up from 43% previously).

While there weren’t any adjustments to speak of outside the equity portfolio over the course of the month, we participated in one of the many recent IPOs and added British company The Hut Group (THG) to the portfolio. THG has a turnover of around GBP 1 billion mostly from two specialist online shops – Lookfantastic (beauty skincare and haircare) and Myprotein (sports nutrition and supplements) – as well as up-and-coming e-commerce platform company Ingenuity. Like most technology-related IPOs, THG’s was greatly oversubscribed, which resulted in us having a relatively small position of only 0.5%. Because it gained 25% on the very first day of trading, we will probably not expand the investment to a fully-fledged position in the near future but take the profit in the event that the price rises further in the near term.

Bad companies are destroyed by crises; good companies survive them; great companies are improved by them.”

Andrew Grove, employee number three and longstanding CEO of Intel, said this in 1994. His words have not lost their relevance in the decades since then. As unique as the current situation is, the quote could be applied to this crisis too. For this reason, the absolute focus of selection remains on the quality of companies and their business models. Thus, the core of Ethna-DYNAMISCH is made up of the stocks of great companies. Regardless of further sudden upheavals and developments, we have a robust foundation in place for the coming months. Coupled with a multi-tiered system of hedging components that, alongside a countercyclical tendency, endeavours to take advantage of and smooth out the volatility of the equity markets, the fund remains equipped with the right tools to handle the crisis.

Figure 8: Portfolio structure* of the Ethna-DEFENSIV

Figure 9: Portfolio structure* of the Ethna-AKTIV

Figure 10: Portfolio structure* of Ethna-DYNAMISCH

Figure 11: Portfolio composition of the Ethna-DEFENSIV by currency

Figure 12: Portfolio composition of the Ethna-AKTIV by currency

Figure 13: Portfolio composition of the Ethna-DYNAMISCH by currency

Figure 14: Portfolio composition of the Ethna-DEFENSIV by country

Figure 15: Portfolio composition of the Ethna-AKTIV by country

Figure 16: Portfolio composition of the Ethna-DYNAMISCH by country

Figure 17: Portfolio composition of the Ethna-DEFENSIV by issuer sector

Figure 18: Portfolio composition of the Ethna-AKTIV by issuer sector

Figure 19: Portfolio composition of the Ethna-DYNAMISCH by issuer sector

* “Cash” comprises term deposits, call money and current accounts/other accounts. “Equities net” comprises direct investments and exposure resulting from equity derivatives.

The investment funds described in this publication are Luxembourg investment funds (fonds commun de placement) that have been established for an unlimited period in accordance with Part I of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the “Law of 17 December 2010”). An investment in investment funds, as with all securities and comparable financial assets, carries the risk of capital or currency losses. The price of fund units and income levels will therefore fluctuate and cannot be guaranteed. The costs associated with fund investment affects the actual performance. Units should solely be purchased on the basis of the statutory sales documentation (Key Investor Information, sales prospectuses and annual reports), which can be obtained free of charge on the website or from the fund management company ETHENEA Independent Investors S.A., 16 rue Gabriel Lippmann, L-5365 Munsbach. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information or a solicitation of an offer to buy or sell securities. Contents have been carefully researched, compiled and checked. No guarantee for correctness, completeness or accuracy can be provided. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information, or an offer to buy or sell securities. The contents have been carefully researched, compiled and checked. No guarantee can be given for correctness, completeness or accuracy. The information includes past data which are no indicator of future performance. The management fee, custodian bank fee and all other additional costs are taken into account in the calculation of the unit price as stated in the provisions of the contract. Performance is calculated using the BVI method (German federal association for investment and asset management), which means that the calculations do not include an issuing charge, transaction costs (such as order fees and brokerage fees), custodian bank fees, or other management fees. Including the issuing surcharge would reduce performance. The performance shown is not a reliable indicator of future performance. Munsbach, 02/10/2020