Shining example of a safe haven asset

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Precious metals - July 2015

For many investors, gold is much more than a safe haven asset; the best known of the precious metals holds cultural and historical significance and in some countries remains a form of currency.

Demand for gold comes mainly from China and India, where it is used in jewellery. The World Gold Council reports that these two countries alone accounted for 54 per cent of total global consumer demand in the first quarter of 2015.

In the first three months of the year, gold demand was relatively flat year on year, with total demand at 1,079 tonnes, down 1 per cent on the same period a year earlier.

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The World Gold Council points out that while global demand for jewellery was still the most significant component of overall demand in the first quarter of this year, even this constituent was 3 per cent lower than the first quarter of 2014, down to 601 tonnes.

The figures identified Malaysia, Indonesia, South Korea, Thailand and Vietnam as “pockets of strength”, with jewellery demand in India soaring 22 per cent to 151 tonnes. But China’s slowing growth appears to be holding gold back, with demand there declining 10 per cent to 213 tonnes in the first quarter.

Juan Carlos Artigas, director of investment research at the World Gold Council, says: “People buy gold around the world to protect their purchasing power – whether it is affected by inflation or currency devaluations.”

Gold faces some uncertainty though, as the prospect of the Federal Reserve raising interest rates looms. Mr Artigas recognises that many investors believe higher real US interest rates will “always be bad news” for gold.

But he claims: “The US interest rate argument is not as strong today as it once was. The case was built largely on an analysis of gold and interest rate performance during the 1970s and 1980s, when economic conditions were very different from today.”

He also suggests market expectations of a rate hike have already been incorporated into the gold price.

James Sutton, portfolio manager of the JPM Natural Resources fund, predicts investors are not going to be punished for holding gold when the first rate rise arrives. “Gold could actually outperform immediately after that rate rise as the market takes a sigh of relief and we move past that negative news,” he explains. “And I think the market will start to focus on the fact that real interest rates will still be very low in absolute terms, and that’s still a positive environment to hold a non-yielding asset like gold, which gives you protection.”

Adrian Ash, head of research at BullionVault, agrees: “The market looks to have discounted the Fed’s first rate hike, just as the Fed’s quantitative easing taper was priced into gold before it began. Further delays will prove supportive. Longer term, higher rates will only count against gold if they outpace the rate of inflation.”

He continues: “On the downside, the floor for gold prices will depend on emerging markets’ appetites. China is now the number one consumer (as well as importer and mining producer). But… we still don’t know what happens to Chinese gold demand during a financial crisis or economic recession.”