From time immemorial, bullion has been the primary investment avenue all over the world. Its appeal as a safe haven asset and a hedge against inflation are some of the properties that set it apart from other common metals. Gold’s 12 year rally has come to a halt at the beginning of 2013, correcting more than 30 percent so far. Worries over tapering of US Quantitative Easing program, reports of the slow pace of economic growth in the top consumer China and a shift in investor interest to other asset class like equities amid signs of an improving global economy are the various factors affecting bullion broadly. There has been a recent shift in portfolio with investors taking chances in equities as the US stock markets hit record highs. Gaining dollar and a weak Euro also reduced gold’s appeal recently.
Anyhow, there are still plenty of buyers around the world who are interested in gold. Reports say low borrowing costs and the support of financial markets was the major drive to invest in bullion. Not just its appeal as a hedge against inflation worries over currency devaluation also prompts investors to buy gold even when consumer prices remain steady. Low bond rates and uncertainties over equity markets have also spooked many investors to believe gold a true safe haven.
Appeal as a safe haven
Investors rush to bullion when any global emergency occurs. Historically, bullion is the only safe investment during geographical or political uncertainties. The abating concerns over the health of the US economy lifted the greenback and have lessened the sheen of gold. However, the ongoing tensions between Russia and the West over Ukraine and escalating tensions in the Middle East largely provided firm support for the commodity.
Worries over any major economy will attract more buyers into bullion. Following the 2007 financial crisis, the US Federal Reserve has introduced many rounds of economic stimulus program, commonly known as Quantitative Easing to curb the financial crisis and bailout for its banks that prompted people largely to invest in gold. Several European countries were also moving through a tough path of economic uncertainties during that period and few of them introduced stimulus measures. That has resulted in a debt bubble and investors turned their attention to bullion. Even if it is a temporary situation, it is believed that gold is relatively better off than paper money or other paper assets.
Demand as a global reserve currency
Now gold is becoming the new global reserve currency. Constant and aggressive buying from various central banks from US and Europe are also driving the global demand of bullion. While some central banks print money in historic amounts, others are buying gold. The central banks of US, Germany, Italy, France and China are placed in the first 5 positions in terms of their gold holdings. Central bank buying of gold was earlier undertaken by Russia, Turkey and Ukraine signaling their trust in bullion. Anyhow, as per reports, gold forms less than 1% of the total wealth of the world today as against 5 percent in the 1970’s.
Supply side worries
Gold supply has not grown in proportion to money supply over the past two decades. As per a report, the world’s entire gold stock would fit comfortably within a baseball infield if all of it is melted together to form a cube. There are roughly around 171,000 tonnes of gold left on Earth. Due to the worries surrounding gold mines, many investors choose to invest in gold bullion and other related products. The average annual demand for gold is nearly 4400 tones and it is on an increasing trend in the past several years.
The Indian phenomenon
Domestic gold had a better sentiment recently amid largely technical buying and the expectations of easing of import restrictions in the country. Historically investing in physical gold is quite natural in India as gold is considered as the best investment option. Rural people in India are the top investors in gold. Since majority of the population comprises depend on the agriculture sector, a good output result in reserve funds and this money is routed to gold. Gold is normally an unavoidable part in most of the Indian marriages and is treated as a gift in various events and functions.
The acceptance and credibility of gold in the investment arena have been developed through many decades, so changing people’s perception about investment in bullion would be a Herculean task.
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The author is Senior Analyst/Research Head, Geojit Comtrade Limited