Bullion At Gold Investments Ltd. As Gold Holds Ground Near Record
NEW YORK: During periods of turmoil, gold tends to make headlines as fans of the precious metal argue it can act as a safe haven.
But is it also an inflation hedge? Is it considered a risk asset?
Joe Cavatoni, market strategist and head of Americas at the World Gold Council, had joined the What Goes Up podcast to discuss how gold has been performing this year and what some of its primary price catalysts are.
The explanation of what’s driving gold prices is a moving target. So the question of what drives the price of gold up or down was put forth to him.
Cavatoni said as an asset, it was very unique because when we think about the strategic drivers of gold and how gold is consumed worldwide, it’s consumed in the consumption way, which is through jewellery, small bars and coins, and maybe in technology like the iPhone, where it’s a component.
And those types of consumption behaviours are driven strategically through economic expansion – simply put, we get wealthier, we feel comfortable about buying jewellery or we buy more technology, and we actually see economic expansion putting money in pockets and people actually using that to invest in things, including gold, he explained.
So is that the primary driver?
To this, Cavatoni said it was, but talking about the big markets like China and India, where there’s a bit of a mix – because it was consumer – there was also an element of savings there.
And then secondly, we have to look at the investment side.
When market risk and uncertainty develops, higher levels of volatility, confusion around what’s going to play out for the next period of time – whether it’s one month, one year, whatever the case may be long term, which is how we often make sure people understand that’s how we need to view gold – the market risk and uncertainty is benefited when gold is added to our portfolio.
This is because in that context, investors see the type of diversification benefit we get from gold in our portfolio as helpful.
So it correlates positively when the S&P 500 goes up, and it correlates negative when the S&P goes down. So we’ve got those two strategic drivers, he elaborated.
Adding to that, we’ve got a global asset. So it’s not just something bought in the United States, but it’s bought and sold all over the world, he said.
China and India are two huge markets from a consumption perspective, he added.
And in addition to that, this asset is actually produced and supplied on a global scale as well. So we’ve got global, regional, consumer behaviour and investment behaviour elements.
Next, he was asked about what has the price of gold done this year, and how do factors like monetary policy impact prices.
To this, Cavatoni said this year, what we’ve seen are two things.
Number one, monetary policy continuing to be a headwind. The opportunity cost, the rotation of assets in a portfolio, risk-asset behaviour, how people are dealing with their risk assets, that’s a moment where we see headwinds for gold.
People don’t look to gold in those moments when movement in rates and movement in those risk assets is taking place, he said.
Once people have made their allocation, they come back around to gold and they put in their portfolio that ballast of a holding – 3%, 5%, 10% of their portfolio.
So the price behaviour this year has seen a lot of that, he explained.
But within the course of the year, we’ve also seen systemic events or moments that have kicked into place – a banking crisis, for a lack of a better way of putting it – moments where there’s a crisis and people say, “Hey look, I need to make sure that I can preserve my asset pool. My real assets need to go up, my safe-haven asset,” he explained.
When the Federal Reserve has managed to cool off the economy, once that starts to develop, that monetary policy will loosen up, the ability for gold to start to see itself run, he said.
Right now, what we’re seeing is range-bound pricing on the gold market. So we see gold holding firm, but not breaking out.
We had a moment earlier in the year around the banking crisis where we did break out, but we’re not really breaking out just yet, he said.
This is simply because most institutional investors have not come back to the table.
The range-bound pricing behaviour we’re getting is being held up by mainly a lot of buying by central banks, which is a trend we’ve been seeing for a long time.
On gold as a safe haven asset, Cavatoni was asked why would someone go for gold instead of something like Treasuries.
To this, he said there were two factors that were pretty significant in terms of performance.
He said gold was a limited-source asset. So over long-term performance, we will see that gold will actually appreciate.
And ultimately what we find with the asset is second, it’s very liquid. The asset trades about US$150bil (RM683bil) a day. So those factors really weigh in and actually make people feel comfortable and confident.
And they are not linked to anything like a credit rating or a dollar currency or whatever the case may be that could have another level of impact on the overall price performance and trading activity of an asset. So he said what we were really looking at was a unique asset that stood by itself. — Bloomberg
