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Gold’s allure set to continue

Allocations to the metal help protect and enhance investment portfolios in times of crisis.
A defensive asset. Image: Dario Pignatelli, Bloomberg

Uncertainty around the global economy will not only support gold as an asset class but also drive consumption of the precious metal, especially in emerging markets, according to the latest Gold Outlook 2021.

This follows gold being one of the best-supported asset classes in 2020 as a combination of high risk, low-interest rates and a rising gold price boosted it.

All these factors resulted in gold, when compared to other asset classes, having one the lowest drawdowns, which is a measure of an asset’s value at its peak against its lowest point in a year.

By investing in gold, investors limit losses and manage volatility risk in their portfolios.

Source: Bloomberg, ICE Benchmark Administration, World Gold Council

The use of gold as a defensive asset was not the only factor driving interest in the metal.

Over the past year, the gold price has surged from $1 522 per ounce (oz) to its current price of around $1 833/oz.

Emerging gold 

Stephán Engelbrecht, a fund manager at Anchor Capital, notes that emerging markets are great consumers of gold, making particular reference to India. He says any increase in demand would be driven by the jewellery market and to a lesser extent the need for computer chips and processors. 

He stresses however that gold as a store of value is by far its greatest utility.

“We seriously doubt that greater demand from jewellery and industrial use will be enough to drive the gold price higher if interest rates were to rise,” he says.

This view is backed by the report.

“Investors’ preference for physical and physical-linked gold products last year further supports anecdotal evidence that this time around, gold was used by many as a strategic asset rather than purely as a tactical play.”

Low-interest rate boost

Krishan Gopaul, market intelligence manager at the World Gold Council believes the low-interest rate environment removes the opportunity cost of investing in gold. 

“Going forward, we believe that the very low level of interest rates worldwide will likely keep stock prices and valuations high. As such, investors may experience strong market swings and significant pullbacks,” says Gopaul.

He says these drawbacks could potentially occur if vaccination programmes are not distributed on time or are less effective than anticipated.

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The report notes that gold has also been known to perform well in high inflation scenarios and equity market pullbacks.

When inflation has been above 3%, gold’s price has risen 15% on average. 

Central banks remain on course to become net purchasers of gold, but are not expected to reach the levels achieved in 2018 and 2019.

“There are good reasons why central banks continue to favour gold as part of their foreign reserves which, combined with the low-interest rate environment, continue to make gold attractive,” says Gopaul.

Meanwhile, after a fall in mining in 2020, the report expects the sector to become active again. 

“Even if potential second waves impact producing countries, major companies have introduced protocols and procedures that should reduce the impact of stoppages compared to those seen in the early stages of the pandemic,” says Gopaul.

He adds: “China and India are the two largest markets for gold, accounting for an average of 52% of annual consumer demand over the last five years [to the end of 2019].

“As such, continued economic recovery in these two countries will have a significant impact on consumer demand.”

Source: World Gold Council

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Jewellery demand has no effect on the price of gold. The safe-haven status of gold does not drive the price either. Those factors are priced in already.

The only long-term driver of the price is the real interest rate in the USA. Gold does not pay a dividend. When the interest rate on the 2-year government bond is higher than the inflation rate, then investors sell gold to buy the bond. When investors expect the interest rate on the government bond to go lower than the rate of inflation, they sell the bond to buy gold.

Gold simply offers protection of purchasing power during times of currency devaluation. That’s it. Now we can move on to the next level in this debate. The serious, or professional investor should determine and compare investment opportunities in terms of gold, and not in terms of the fiat currency. If the Nasdaq rises in terms of gold, buy the Nasdaq. If nothing rises in terms of gold, then buy gold. Gold is not an investment. It is a unit of account, a store of wealth and parking place for cash when everything else crashes in terms of gold.

The aim is to get the maximum yield from the opportunity costs.

The story of gold since 1971 is for some an education exercise for the aplication of the Elliott Wave Theory which clearly shows the completion of 4 out of 5 Cycles and the further completion of 4 out of 5 Primary waves of the 5th Cycle. Within the 5th Primary of the 5th Cycle there are 5 Intermediate waves. The 3rd Intermediate wave is now being entered.
What happens when all 5 Cycles are completed? There will then be a Supercycle correction.

The supercycle correction may coincide with the end of the petrodollar system and the USA losing its monopoly to print the reserve currency of the world.

For the less informed, please can you clarify re the supercycle correction -e.g. does that mean gold is peaking from a long term uptrend and likely to correct downward?
Also if I may, what would be the indicator that the 5th wave is complete?

Yes. Trend from 1971. My target is just over $2700. It is expalined and shown there but links are removed on this comment setup. Maybe it can work if dot is .

COMMENT HELD FOR MODERATION
20 JANUARY 2021 @ 10:27 PM
Yes. Trend from 1971. My target is just over $2700.

Comment on story: Gold’s allure set to continue

It appears that I am unwanted here. See sharechat thread for gold

Many thanks Gargoyl,

Found it, most informative, so not sure why it would be ‘removed”

You must have been very bad, even the option of replying to your comment has been removed?!
:-))

The USA deficit to GDP ratio looks set to continue unchecked. The New Monetary Theorists taking command of the military industrial complex- Pirates of the President?

Crypto, the new kid on the block(chain) has raced into position as part of the hedge against what is to follow.

This is a virtual “real” imitator of the Real properties inherent in gold. And its weakness is that it exposes the holder to more volatility, not less.

Not so Real (c) gold, as you so well illustrate here. It’s impressive history predates human urbanisation over 10000 years ago in the days of Baal!

The 3 waves of monetary expansion- deflation, stagnation and degeneration followed by a full blown credit crunch on the cards more so and more so.

Those who say gold doesn’t pay dividends living in the outer Hebredees with no access to the JSE? This asset class still has major key benefits to deliver going forward.

End of comments.

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