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Blog October 18, 2019 Rohan Narula

2019: Reasons Why The Gold Rush Is Back

According to a report[1] by Bloomberg Intelligence analyst, Mike McGlone, markets are in the early days of acknowledging the potential upside in primary store-of-value, quasi-currency, diversifier assets gold and silver”. 

Substantiating this view, Alistair Hewitt, Head of Market Intelligence at the World Gold Council, commented[2]: “June was a big month for gold. The price broke out of a multi-year trading range to hit a six-and-a-half year high and gold-backed ETF assets-under-management grew by 15% – the largest monthly increase since 2012.” In addition, he endorsed his remarks by bringing light on the Fed’s dovish turn as the prime reason in building a strong H1 that saw gold demand surging a three-year high strongly backed by central bank buying. He further added how he saw an individual level sales upsurge as investors took advantage of June’s price boom to lock profits, jewellery recycling and retail bullion liquidations.

He concluded by saying, “As we head into H2, we believe the factors underpinning ETF inflows and central bank buying, including looser monetary policy and geopolitical uncertainty, will continue. Consumer demand, however, may be a bit soft as people adapt to the higher price level.”

Source: Legacy Investment Managers

Why The Rush?

Spot gold prices, as on 14 October 2019, are trading at a six-year high. The onset of the last recessionary period witnessed gold prices climbing from the $870 mark at the close of 2008 to $1,664 in 2012 – representing a 72% increase in the value of bullion. This year, gold-backed exchange-traded funds (ETFs) exhibited the highest volume of investment inflows since 2013, according to Ranjeetha Pakiam at Bloomberg[3]. There has been a staggering 19% rise in the gold prices since the start of 2019

The increase in demand for bullion can be attributed to several factors including prevailing global economic conditions and scattered geo-political instabilities:

  • Increased Buying by Central Banks – Harry Dempsey of the Financial Times reported[4] in August this year that globally central banks, particularly those of Poland, Russia and China, bought 374 tonnes of gold amounting to $15.7 billion, a record acquisition of bullion within the first two quarters of any given year.
  • US-China Trade War – The ongoing trade war with China, and disappointing recent economic data on the home-front have led to fear and bearish sentiments amongst US investors about a possible global economic slowdown, and markets moving into a recession. An inverted yield curve, as in the present case, is a clear sign of recessionary times, and increased flow of funds into gold as a safe haven.
    Concerns surrounding the US-China tariff war have been eased slightly after US President Donald Trump announced that China had indicated a willingness to resume trade discussions; however, until formal agreements are not signed, it is more than likely that gold will continue to outperform the wider securities market.
  • Brexit – The Brexit issue is likely to take center stage this month, with the UK and EU negotiators hammering away at a possible deal – however latest reports indicate that while a compromise has been reached between them, the Democratic Unionist Party of Northern Ireland is refusing support after the EU Council Summit in Brussels yesterday, October 17th. While every effort is being made to finalize the UK’s transition out of the European Union, the fear of a “no deal” is gripping investor sentiment, as this situation leaves the UK isolated and unable to trade under properly negotiated terms. Under these circumstances, with a weakening pound sterling, gold prices are more than likely to push north of the $1,550 mark.
    Political indecisions and disagreements within the UK’s Conservative Party, with a majority of members vying for a “hard Brexit”, is cause for worry as it will leave the nation with limited access to capital inflows until new trade agreements are formalized with the EU, and the subsequent slowdown will further weaken the pound sterling – thereby driving funds to gold.
  • Hong Kong Pro-Democracy Protests – Hong Kong’s civil unrest over China’s perceived interference in its judicial independence and proposals to allow extraditions to take place to the mainland has led to violent protests and clashes between the public and security forces.
    Brown Brothers Harriman’s Global Head of Currency Strategy, Win Thin[5], said, “The situation in Hong Kong is deteriorating… This led to heightened criticism from the mainland, with senior official saying the protestors had committed serious crime and showed signs of ‘terrorism.’ The Hong Kong economy is already suffering from the US-China trade war, and these ongoing protests will only make things worse”
    H Joshua Rotbart J. Rotbart & Co, a Hong Kong-based bullion house that helps high net worth individuals purchase, stock and transport precious metals, said to Reuters[6] that their individual investors are preferring to hold their gold investments in a haven that they consider safe. According to him, hundreds of millions of dollars’ worth of gold has left Hong Kong for safer jurisdictions such as Switzerland and Singapore.
  • Other Global Factors – The run on the Argentine peso, possible flare-ups between the US and China on Iranian oil shipments, the Turkish military incursion into Syria, India-Pakistan tensions over the former’s abrogation of Article 370, global recessionary fears, are some of the contemporary events causing a paradigm shift into safer commodities and currencies such as gold, JPY and CHF.

Source: Gold.org

Options For Investment 

Investments in commodities are usually more complex for investors than buying stocks, mutual funds or bonds, for example. You cannot walk into a store and buy a barrel of crude oil. Navigating the futures and options market is a complex exercise, even to the most seasoned investors. Some commodities however, such as gold, do offer several entry routes for investments:

  • Physical – Gold can be purchased physically quite easily in the form of jewellery at a store, or in the form of coins and bars from a dealer or a bank. Bars and coins account for two-thirds of the annual investment demand for gold.
  • Allocated Gold Accounts – Institutional and high net-worth investors can approach bullion banks and buy an allocated bullion account, thereby becoming the legal owner of a specified quantity of gold.
  • Gold ETFs – ETFs, or Exchange Traded Funds, are an easy and relatively inexpensive way to access the gold market. An ETF will reflect and replicate the price movements of the underlying asset (in this case, gold), and give investors direct access to the commodity. It should be noted that while not all commodities have an ETF based on them, oil and gold do. According to investopedia.com[7], the SPDR Gold Shares deals with the New York Stock Exchange and can be traded throughout the day. If gold is $1300 an ounce, the gold ETF will trade at $130 per share making the ETF represent one-tenth of an ounce. 
  • Gold Mining Stocks – Investing in companies involved in gold mining might offer an opportunity when gold prices are on an uptrend; however, it should be considered that valuations of these companies will be based on their future earning potential, and not necessarily on the corresponding trade value of gold.
  • Gold Derivatives – Gold futures and options are traded wholesale over the counter (OTC) or on exchanges. This route requires significant knowledge and carrier higher risk, and is best suited for experienced investors.

Source : Gold.org

So Now What?

Buying physical bullion might seem like the most suitable route; however, secure storage facilities and quality concerns might need to be considered before rushing off to the nearest dealer. On the other hand, ETFs are a better way to go as part of a portfolio diversification strategy, as Donald P. Gould, Chief Investment Officer at Gould Asset Management, points out[8]

It would be prudent to consult with a qualified investment professional before making any financial decisions related to your portfolio.

Disclaimer: This blog is published for educational purposes only and does not constitute investment, legal or tax advice or a recommendation or an offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments. All views contained in this blog are the personal opinions of the author based on publicly available research and news.

 

[1] https://www.bloomberg.com/professional/blog/unprecedented-foundation-advancing-gold-silver-prices/
[2] https://www.gold.org/news-and-events/press-releases/h1-gold-demand-jumps-to-three-year-high 
[3] https://www.bloomberg.com/news/articles/2019-09-02/gold-etfs-surge-more-than-100-tons-in-august-as-havens-in-vogue
[4] https://www.ft.com/content/b62ebb1a-b3a6-11e9-bec9-fdcab53d6959#targetText=Data%20released%20by%20the%20World,first%20half%20of%20a%20year.
[5] https://www.kitco.com/news/2019-08-12/Hong-Kong-Protests-Trigger-A-New-Bid-Under-Gold.html
[6] https://www.reuters.com/article/us-hongkong-protests-gold/hong-kong-gold-market-losing-shine-amid-political-unrest-idUSKCN1VY00H
[7]https://www.investopedia.com/ask/answers/06/investingingold.asp
[8] https://www.investopedia.com/ask/answers/06/investingingold.asp

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