(June 17): It appears that all that is gold glitters now, with more central banks, exchange-traded funds (ETFs) and consumers buying the precious metal. Gold accumulation by central banks and other institutions rose 68% y-o-y in 1Q2019. Recent data from the World Gold Council (WGC) shows that central banks’ net purchases of gold totalled 145.5 tonnes for 1Q2019 — the strongest 1Q purchase since 2013, during which 179.1 tonnes were bought.

Among the central banks, Russia led purchases, buying some of 55.4 tonnes in 1Q. This comes on the back of the country’s de-dollarisation drive, as it reduces its US Treasury holdings. China was another large buyer, purchasing 33 tonnes. The world’s second-largest economy had only resumed gold purchases last December, after a 25-month pause.

Other central banks also made significant additions to their gold reserves in the quarter. Ecuador boosted its gold holdings by 10.6 tonnes, making its purchase for the first time since 2014. Turkey also continued its gold accumulation with a purchase of 40.1 tonnes, while India bought some 8.4 tonnes after a nine-year hiatus.

Interestingly, large buyers of gold are countries such as Russia, Turkey and India, which are taking steps to switch out of the US dollar for bilateral trade deals. China, too, is going down this path, by encouraging its trading partners in Asia to switch to the renminbi.

Globally, with holdings of more than 2,450 tonnes, the Italian central bank holds the most gold. France is No 2 with 2,436.4 tonnes, followed by Russia with over 2,168 tonnes. Gold is an important component of Russia’s reserves, accounting for 19% of its reserves. China’s central bank holds the third-highest amount of gold, at 1,885.5 tonnes (less than 3% of its total reserves). China is also the largest consumer and producer of gold, Aram Shishmanian, CEO of WGC, notes in a report titled “The new China”, published in October 2018.

The Monetary Authority of Singapore (MAS) holds 127.4 tonnes of gold.

Gold purchases triggered by uncertainty

Central banks are increasingly turning to gold as geopolitical tensions and global uncertainty prevail. Alistair Hewitt, director of WGC and head of its Market Intelligence Group, notes that central bank demand has been very strong in the past 18 months, with 2018 seeing the highest demand in 50 years. Demand in 2019 appears to be similarly strong, he adds.

“The drivers of central bank demand are varied. Typically, a central bank wants an asset that is safe, liquid and generates returns, in that order. Only when safety and liquidity are satisfied do they then look at returns. So, gold ticks all of those boxes,” Hewitt tells The Edge Singapore.

“One of the many reasons central banks have been buying gold is because of the foreign exchange risks. People are concerned around the US dollar exposure, and gold is a very effective hedge against USD exposure. So, many central banks hold significantly large amounts,” he adds.

A joint survey by WGC and market research company YouGov of 22 central banks showed that 71% invested in gold because of its ability to improve risk-adjusted returns and its use as a valuable collateral. This is in addition to the common belief that gold is a “safe-haven” asset and an effective portfolio diversifier.

Some 18% of the 22 central banks surveyed plan to increase their investments in gold in the next 12 months, as opposed to the 82% that did not have any plans to make changes. None intended to decrease their exposure to gold within the year. The survey also showed that 61% did not have a target amount for gold allocation, while the remaining 39% responded that their current investment in gold is in line with their targets.

Now seems to be an opportune time to buy gold as the value of the US dollar drops, according to economist Samuel Tse from DBS Group Research. Tse notes that the dollar has begun to lose some strength following expectations of falling interest rates. This has resulted in the rebound in gold prices, despite rock-bottom inflation expectations. He adds that the move to gold reflects a “flight-to-safety phenomenon”.

Hewitt expects central banks to buy more gold in the coming months. “Central banks are looking at the world and thinking, ‘well, we have been buying a lot of gold recently, but the current macroeconomic conditions, the political uncertainty, encourage us to add a little bit more gold,’” he says.

Effect on retail investors

Understanding the investment habits of central banks is helpful to investors, in that it shows their “concerns, and the actions they are taking to address those concerns”, says Hewitt. Retail investors, like central banks, are affected by the same geopolitical uncertainty, financial market risks and concerns about currency weaknesses, as these factors affect the feasibility and volume of investments.

Market strategists suggest that investors hold gold in their portfolio as the trade war upends the supply chains and earnings expectations of tech-related companies. Volatility in equity markets — dependent on presidential tweets — has also steered investors into the safe haven of gold.

No surprise then that overall gold demand grew 7% y-o-y from 984.2 tonnes in 1Q2018 to 1,053.3 tonnes in 1Q2019, with 907.8 tonnes bought by retail investors.

Gold-backed ETF demand rises

One way for retail investors to hedge their bets is to invest in gold-backed ETFs. The market is deep and liquid, making it easier for investors to trade ETFs. In 1Q2019, there was a 49% increase in demand for gold from gold-backed ETFs, from 27.1 tonnes in 1Q2018 to 40.3 tonnes in 1Q2019. These ETFs account for some US$1.9 billion ($2.59 billion) of gold. US-listed funds grew 2% as investors added 26.4 tonnes, equivalent to US$1.1 billion, to their holdings in North America-listed funds. There were also stronger inflows following an escalation in tensions between the US and China. However, this reversed later in the quarter.

In Asia, ETF demand eased, with a loss of 1.4 tonnes in Asia-listed funds, mostly from China. Albert Cheng, CEO of the Singapore Bullion Market Association of Singapore (SBMA), says: “I think in Asia, the elephant in the room is China, because of the trade war with the US. Asia is going to suffer — growth has come down because business has decreased with the tariffs and anti-tariffs. This will have an impact on China, the world’s second-biggest economy.”

Supply to stay consistent

As demand for gold rises, supply has stayed flat. Data from WGC shows that total supply was largely unchanged and stood at 1,150 tonnes in 1Q2019. A rise in production by countries such as Russia, Australia and Kazakhstan was offset by declines in China.

Another factor influencing supply is net producer hedging, which was down 72% y-o-y as the international price of gold rose 9% in US dollars between the start of 4Q2018 and the end of 1Q2019. This increase is attributed to concerns over the global macroeconomic and political landscape. However, the impact of the phenomenon was mostly seen in the gold prices in key producer countries.

Hewitt believes supply will remain consistent over the years. “The big picture is that supply has grown over the past 15 years. Our indications and expectations are that mining production will grow over the next few years,” he says.

His comments come as the industry gets more regulated, with the London Bullion Market Association — the organisation that precious metals associations benchmark against — requiring all refiners and distributors to adhere to stringent regulations if they want to be accredited by it and be on its Good Delivery List. This ensures that the gold supplied by most refiners is of good quality. Sakhila Mirza, executive board director and general counsel of LBMA, says about 70 countries are on the list, comprising 95% of global gold refining producers. “If you are accredited by LBMA, you can sell gold in the international market. If you are not on that list, the London market and several other markets will not accept your gold,” she tells The Edge Singapore.

Singapore authorities too have stepped up their regulation of the precious metal industry.

Include gold in portfolios

Both Cheng and Hewitt encourage investors to include gold in their portfolio — with Cheng saying 3% to 5% is a good percentage to have and Hewitt saying 2% to 10%.

Hewitt likes that gold is the most customisable of investment options available, although he adds that he would not say that one investment product is better than the other “because it comes down to the investment objectives of the individual investor”.

Cheng advises individuals with access to equity or stockbroker accounts to buy ETFs because of the low transaction fee and the ease of purchasing gold. The SPDR Gold ETF, which is listed on the Singapore Exchange, is one such ETF available. For physical players, Cheng suggests buying gold bars, and for more conservative players, he advises buying jewellery.

Retail investors can open a gold savings account or buy gold bullion from United Overseas Bank’s main branch in Raffles Place. Alternatively, they can visit the branches of Goldheart Bullion, which has a wide array of physical gold.

Whichever form of gold they choose, they can take direction from central banks and invest in the precious metal.  

This story appears in The Edge Singapore (Issue 886, week of June 17) which is on sale now. Subscribe here