Global investors once more warming to gold

Category: Asia, Global

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Market pundits anticipate investors’ appetite for gold to be reignited as the global economy wrestles with uncertainties relating to US monetary tapering, the eurozone weak and Japan’s dubious economic reforms.

Experts believe long-term outlook for the precious metal is positive due to insatiable demand from India and China as well as a decline in new supply. In addition, gold is a very important asset from an investment standpoint with its low correlation to other asset classes and inflation hedging potential.

According to Kevin Anderson, head of investments, Asia-Pacific at SSgA, the sluggish global economic recovery can be evidenced by the fact that US fiscal tightening reduced GDP growth by as much as 1.5% in 2013. Also, the US began applying tapering measures to its quantitative easing (QE) programme in January and will continue to do so through the year, with purchases ending some time during the fourth quarter.

As for Japan, the impetus of the Abenomics’ concessionary measures looks flimsy. The ultimate success of the policy is dependent on structural reforms, and the commitment to these remains unclear. For the eurozone, its GDP has returned to the black this year despite growth being marginal.

Against this economic backdrop, Mr. Anderson notes that the risk of market conditions entering extraordinary territory is a possibility, with central banks making policy errors, intensifying currency issues in emerging markets, and confidence lessening in mainland China’s financial system.

The risk of a financial shortfall in 2013 led speculators to reduce their positions in gold. Mr. Anderson opines that the yellow metal has shown itself to be an asset for turbulent times that could be used to diversify against tail-risk events. In addition, he says it is an asset which is the liability of no one.

Mr. Anderson goes on to say that the demand for gold has shifted from West to East given that China and India are the largest consumer of the precious metal – continuing strong Chinese growth should support consumer demand.

China overtook India as the world’s largest gold consumer in 2013 as demand for jewellery and retail investments soared. According to the figures from IMF IFS Statistics and the World Gold Council, China was the largest gold purchaser among the G20 emerging countries between 2007 and 2012.

Citing a survey conducted by World Gold Council in July 2013, Roger Liu, director, investment, Far East with WGC Investment Services, states that 66% of 2000 Indian and Chinese respondents anticipated that the price of gold would increase over the next five years. 62% of the respondents said they held a positive view on gold in the May survey.

Mr. Liu points out that China’s per capita gold consumption is still low compared to Hong Kong and Taiwan. The average household ownership of gold in China is approximately close to one gramme.

On gold exchange traded funds (ETFs), Mr. Liu says ETF holdings have moved back to pre-crisis levels despite gold moving from West to East – gold ETF outflows from Western institutional investors have been absorbed by retail consumers and investors in Asia and the Middle East. “Driven by physical demand, the gold price is de-coupling from ETF redemptions,” he adds.

On the supply side, Mr. Liu notes that provisions are receding due to a lack of major new discoveries, declining reserves, and a contraction in supply stemming from recycling. He identifies interest rates, supplies of money, economic growth and the strength of the US-dollar as the near-term factors affecting gold prices.

From an investment strategy standpoint, Thomas Poullaouec, head of strategy and research, Asia Pacific at SSgA, says a modest strategic allocation to gold is recommended as part of a multi-asset portfolio because of its low correlation to other asset classes, purchasing power protection (PPP), and may enhance portfolio risk/return during periods of crisis.

Mr. Poullaouec states that gold and other precious metals have demonstrated the ability to hedge general price inflation, especially over the long term. In addition, gold has a strong PPP with its negative correlation to US dollar and has the capability of serving as an effective complement to other currency hedging strategies. It also serves as a store or transfer of wealth over the long run, and it links to both developed and emerging market dynamics.

According to Mr. Poullaouec, the average allocation to gold in a diversified portfolio should range between 0% and 14%, and more allocation to gold is recommended in a conservative portfolio.

He adds that investors with high sensitivity towards local currency depreciation, high expected inflation, bond defaults and interest risks, and economic uncertainties should have a higher exposure to gold.

“Overall, gold is part of a broad investment universe with its unique features and liquidity. Investors with gold exposure in their multi-asset portfolio can potentially benefit from its PPP and diversification,” says Mr. Poullaouec.

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