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FINA 6222FB
SELECTED TOPICS IN FINANCE:
MACRO INVESTMENT STRATEGY
MACRO INVESTMENT STRATEGY -
IN PRACTICE
Dr. Paul M. Kitney
Term 3, 2021-22
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MARCH 2020
ANALYSIS - CASE
 CASE – MARCH 2020 ASSET 3

ALLOCATION CHANGES
• Daiwa Presentation Deck

• TV Interviews with ET and CNBC TV18

• Big Call – Upgrade China, China-A, Hong Kong and lowered weighting in
India

• Upgrade to China-Tech Sector

• Class Discussion
 CREDIT MARKET RISKS and FED 4

DECISION - CASE
• We will go over several short reports on the vulnerabilities in credit
markets

• Chinese USD Credit

• High-Yield Energy Market

• Impact of the Fed’s actions on these markets

• Class Discussion
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GOLD MARKET
ANALYSIS
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GOLD – USD CORRELATION

• There is a negative correlation between gold and the USD

• Gold is often seen as a substitute for fiat currency
• When the US eases monetary policy sufficiently to weaken
the USD, it tends to boost gold prices
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GOLD – 10YR BOND CORRELATION

• There is a negative correlation between gold & 10 year bond yields

• As an “alternative currency” the opportunity cost of holding gold
rises with interest rates
• Fed QE keeps bond yields down, supporting gold prices
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GOLD – INFLATION CORRELATION

• There is a positive correlation between gold & US inflation

• Higher inflation lowers the value of money (fiat currency) and
raises the value of it’s alternative – Gold (or crypto)
• Clearly Gold reacts inversely to real bond yields, which are
clearly being driven lower by Fed policy now.
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GOLD MARKET - DEMAND

• Gold’s main substitute asset markets – historically cash and in
recent times, cryptocurrency, such as Bitcoin, Ethereum etc.

• All of these assets have the quality of a medium of exchange.

• Cash is a store of value and Bitcoin is striving to be established as a

store of value.

• All of these are a unit of account

• To be considered money, an asset must be all three: a medium of

exchange, a store of value and a unit of account
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GOLD MARKET - DEMAND

• We apply the theory of portfolio choice to Gold Demand and we
get more specific
• Wealth – the more financial resources (wealth) the greater the
demand
• Risk – the degree of uncertainty (risk) associated with the return of
the asset in comparison to another
• Liquidity – the speed of to convert an asset into cash relative to a
subsitute’s ability to be converted into cash
• The expected return relative to a substitute’s expected return
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GOLD MARKET - DEMAND

• Expected Return of Gold (Re ) is given by:

• Expected return for gold is the major determinant of the gold

price, just in the same way as we have analyzed other asset
markets such as bonds

• Unlike bonds (or equities) there is no yield on Gold

 GOLD MARKET - SUPPLY 12

• Supply curve is upward sloping – All things being equal, a higher

price of gold will induce producers (gold mining companies) to
mine extra gold.

• These factors explain the shape of the supply curve, but not the
shifts

• Shape is steep, due to the inelastic supply of gold, namely the

limited quantity of gold remaining in the ground, relative to the
gold extracted over thousands of years
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GOLD – DEMAND CURVE SHIFTS

• What factors shift the Gold Demand Curve?

• Inflation – Positive relationship with expected inflation, raising

expected return.

• Falling real bond yields – Why? Since the relative real return on
bonds fall relative to Gold. In other words the relative expected
return on Gold (relative to cash) rises

• Liquidity – Issuance of Gold ETF’s, “electronic Gold” in bank

accounts, etc.

• Trends in Jewelry consumption of Gold and industrial uses. Which

is the biggest consumer market for Gold in the World?
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GOLD – DEMAND CURVE SHIFTS

• How does Cryptocurrency impact Gold Demand? Relative
expected Return
• Crypto is a major challenge to Gold’s position as the major
alternative to Fiat Currency.
• Risk (relative) – The lower (higher) the volatility of Bitcoin relative
to Gold the lower (greater) the uncertainty (risk) of Bitcoin relative
to Gold. Lower (higher) risk in Bitcoin leads to higher (lower)
demand for Gold
• Liquidity – The greater the acceptance of Bitcoin in countries and
the construction of crypto-markets, exchanges, the higher the
liquidity of cryptocurrency, and the lower relative liquidity of Gold,
lowering the demand for Gold
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GOLD – SUPPLY CURVE SHIFTS

• Changes in the technology in gold mining that make mining more

efficient should shift the supply of gold (to the right)

• Decisions by governments to sell strategic holdings of gold can

impact the supply of gold on the international gold market
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GOLD MARKET EQUILIBRIUM

• Equilibrium in the Gold market is when gold demand equals supply

• Shift right in the demand curve for gold increases the price
significantly due to the inelastic supply.
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GOLD IS NOW IN PLAY IN REAL TIME
• Gold has caught a bid in real time right now. Why? We explore all
the various factors in Bloomberg to understand this move.

• What is the role of Bitcoin Volatility?

• What has been the recent trend of inflation expectations?

• Has Elon Musk played a role?

• Gold Bullion or Gold Shares?