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Gold: Back in Favour

By Finews Asia
Gold is back: after five years in the doldrums, investors are snapping the precious metal up in large quantities. Here are the reasons for its revival, and why demand is expected to remain strong in Asia.

Central banks have added more gold to their reserves than at any time since the 1970s. Russia is the most active among the buyers, according to recent figures provided by the World Gold Council (WGC).

In 2018, central banks around the world added 651 tonnes of gold to their holdings, the biggest net increase since 1971, when the free convertibility of the U.S. dollar into gold was suspended by the Nixon administration. And data shows that last year’s net increase is the second-highest ever.

The demand for gold by central banks increased 74 percent from a year earlier. With the price of gold at about $1,310 per ounce, the volume of the metal purchased by central banks corresponds to about $27 billion.

Even as demand for gold soared, the price didn’t increase at the same pace. The reason is the level of supply. Mines around the world produced 3,347 tonnes of gold last year, a new record. The recycled volume also reached a record 1,173 tonnes.

Still, experts say that the price of gold may soon rise substantially as several factors combine to form the perfect storm. First, they say gold is becoming more attractive as the equity bull market is coming to an end, forcing investors to shop around for other assets.

Second, with volatility increasing, investors are looking for stability, which may also benefit the gold price. And third, the dollar is expected to get weaker this year – also benefiting the gold price. The US dollar and gold tend to move in opposite directions.

The fourth aspect is a lack of trust in the US under the guidance of President Donald Trump, which in turn may help depress the dollar further – thus pushing up the price of gold.

Fifth: a currency crisis and level of indebtedness in many countries will whet the appetite of investors for gold, given its functions as a long-term safe haven. With a potential slump of cryptocurrencies also potentially imminent, some investors may be looking for other, more traditional, vehicles.

Sixth: the world is undergoing substantial change, with many industries facing challenges from resurgent technological competitors, with the «old» West grappling with the «new», dynamic East and a society that is getting older, putting pressure on pension systems designed for a different era. The sense of unease tends to favor investments in gold, analysts say.

Seventh: a stock exchange crisis may precipitate an even stronger decline of indexed products. A rapid decline in index products may lead to an ever faster and deeper crash, studies have shown.

It may be a little ironic that it is Russia that is leading a trend, having been crisis-ridden for so many years. The U.S. meanwhile is moving into a more isolated position and the dollar, which still is so important for the pricing of gold, is losing some of its importance.

Demand for Gold to Remain Strong in Asia

A weak global economic outlook, heightened geopolitical tensions and financial market instability are factors supporting gold demand, especially in Asia, where investors have long used the precious metal as a hedge against volatility.

“Gold jewellery and bar demand in Vietnam, Indonesia and Thailand showed high single-digit growth due to the weakening of regional currencies, the safe haven argument for gold in a volatile environment, and low unemployment rate. Going forward, these economies should continue to be resilient, and we should see strong single-digit gold demand growth in Southeast Asian countries in 2019,” Singapore Bullion Market Association (SBMA) CEO Albert Cheng told finews.asia.

Cheng however, pointed out the risks posed by escalating trade tensions, highlighting that while gold investment has benefitted from financial market volatility, physical gold demand in Southeast Asia slowed down significantly in Q4 last year due to headwinds caused by a volatile equities market and trade disputes between China and the U.S.

Strong gold demand in Southeast Asia bodes well for Singapore, which has in recent years positioned itself as the region’s gold hub, attracting precious metals participants with government initiatives to develop the country’s investment precious metals (IPM) sector.

“Singapore’s well-established infrastructure, advanced technology, mature legal system and triple-A sovereign credit rating make the city-state an ideal gold trading hub in Asia, and provide distinct connectivity for the industrialists in the region,” SBMA Deputy Chief Executive Gordon Cheung said.

Investment banks with a presence in Singapore that are active in the gold market here include ICBC Standard Bank, the Bank of Nova Scotia, Standard Chartered, UBS and JP Morgan.

This article was previously published by Finews at www.finews.asia.


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