From a mathematical perspective, Quant Insight sees the current trading levels of the gold price as ‘cheap’, especially as safe-haven games dominate the market.
“Our models show that the price of gold is cheap”
Huw Roberts, head of analytics at Quant Insight, said that gold’s upcoming and Cryptokoin.com says it looks like a bargain after falling to $1,800 in the last few sessions in light of the Federal Reserve’s aggressive rate hikes. The analyst uses the following expressions:
Our models show that the gold price is cheap. There is between 5% and 7% impairment depending on which time horizon you look at.
Huw Roberts: It’s too early for dips
Quant Insight’s algorithm is all about macro drivers. Huw Roberts states that they look at economic fundamentals such as growth and inflation, and financial conditions (whether real yields are rising, the yield curve is flattening, or the dollar is getting stronger). Putting it all together, gold seems undervalued, but there is one caveat: the algorithm’s confidence level.
The algorithm generates a model confidence number, which basically means ‘goodness of fit’. Huw Roberts states that the threshold for any signal to be valid is above 65%, and currently says the confidence of the model is around 50%, despite making gold look cheap. Stating that this means it’s too early for investors to buy the dip, the analyst explains:
We’re not on the threshold, so we wouldn’t go out and say it’s time to buy the dip. Instead, we can say that gold is undervalued given the current macro conditions. However, since we are below the 65% threshold, we are not in a macro regime and we see it as a metal to watch more.
“The two dominant drivers for gold, risk aversion and credit spreads”
Credit spreads are currently a major driver for gold Stating that it is a strength, the analyst says that higher VIX and wider credit spreads are good for gold. The analyst also states that gold is currently traded as a safe haven. The analyst continues as follows:
Gold’s safe-haven attractiveness is a more prominent driver for hedging from inflation. This outweighs the relationship with the VIX and credit spreads currently for gold. Meanwhile, the traditional relationship between gold and real interest has been broken, and it’s important to keep this in mind.
