OUTLOOK 2017 THE GOLD MARKET FEATURE
is historically seen as an inflation hedge. Second, higher inflation will keep real interest rates low, which in turn makes gold more attractive. And third, inflation makes bonds and other fixed income assets less appealing to long-term investors.
INFLATED STOCK MARKET VALUATIONS
Stock markets had a significant rebound in the last stretch of 2016. And while some stock markets are just recovering from lacklustre multi-year performance, stocks in the US have reached historical highs.
In many cases, valuations have been elevated, as investors increase their risk exposure in search of returns in a very low yield environment. Until now, investors have used bonds to protect their capital in the event of a stock market correction. As rates rise, this is a less viable option - and in the meantime, the risk of a correction may be increasing. The interconnectedness of global financial markets has resulted in a higher frequency and larger magnitude of systemic risks. And as Jim O’Sullivan puts it: “The [US economic] expansion will not last forever.” In such an environment, gold’s role as a portfolio diversifier and tail risk hedge is particularly relevant.
LONG-TERM ASIAN GROWTH Macroeconomic trends in Asia will support economic growth over the coming years and, in the view of the WGC, this will drive gold demand. In Asian economies, gold demand is generally closely correlated to increasing wealth. And as Asian countries have become richer, their demand for gold has increased. The combined share of world gold demand for India and China grew from 25% in the early 1990s to more than 50% by 2016. And other markets such as Vietnam, Thailand and South Korea have vibrant gold markets too. While jewellery demand in China has suffered from changing
50 JEWELLERY FOCUS
consumer tastes, the investment market has undergone a remarkable period of development. In little more than 10 years its bar and coin market has become one of the world’s largest. China’s gold- backed ETFs continue to grow as well. Investors bought 30.3 tonnes of gold in 2016 through ETFs - an almost six-fold increase in assets under management. Trading volumes on the Shanghai Gold Exchange are increasing. In India, the government’s decision to remove large denomination rupee notes (Rs. 500 and Rs. 1,000) took around 86% of India’s circulating cash out of its economy. While the purpose is to replace them with newly printed notes, the WGC believes that the liquidity squeeze could have a temporary negative effect on economic growth, and may also affect gold demand in the short term. But more importantly, the WGC believes that the transition to transparency and formalisation of the economy will lead to stronger Indian growth in the longer term, thus benefitting gold.
‘‘ Long-term Asian growth
Macroeconomic trends in Asia will support economic growth over the coming years and, in our view, this will drive gold demand. In Asian economies, gold demand is generally closely correlated to increasing wealth. And as Asian countries have become richer, their demand for gold has increased. The combined share of world gold demand for India and China grew from 25% in the early 1990s to more than 50% by 2016. And other markets such as Vietnam, Thailand and South Korea have vibrant gold markets too.
OPENING OF NEW MARKETS Gold is becoming more mainstream. Gold-backed ETFs made gold accessible to millions of investors, primarily in the West, over the past decade, but other markets continue to expand too. China has seen dramatic growth in recent years
“Asia will account for around 60% of global growth in 2017”
David Mann, Chief Econom da
h
While jewellery demand in China has suffered from changing consumer tastes, the investment market has undergone a remarkable period of development
through Gold Accumulation Plans, physically - settled gold contracts in the Shanghai Gold Exchange. In Japan, pension funds have increased their gold holdings over the past few years. In the corporate sector, more than 200 defined- benefit pension funds have invested in gold. In addition, more than 160 defined-contribution plans have added gold to their list of investments.
The WGC expects this trend to continue and expand into Western markets, where pension funds have had to rethink
asset allocation
strategies following prolonged exposure to low (and even negative) interest rates. The WGC said: “In our view, this will result in structurally higher demand.”
this resilience, and has cushioned the region against its high degree of openness to external trade. Asia will account for approximately 60% of global growth in 2017.”
About the World Gold Council Stan rd Cartered Bnk
As David Mann notes. “Asia has reduced its economic exposure to the West. […] The region has achieved relatively strong growth since the global financial crisis, despite persistently weak growth in the West. Domestic demand – from both consumers and investment – is behind
ist, Asia a
The World Gold Council is the market development organisation for the gold industry. Its purpose is to stimulate and sustain demand for gold, provide industry leadership, and be the global authority on the gold market. Based in the UK, with operations in India, the Far East and the US, the World Gold Council is an association whose members comprise the world’s leading gold mining companies.
While jewellery demand in China has suffered from changing consumer tastes, the investment market has undergone a remarkable period of development. In little more than 10 years its bar and coin market has become one of the world’s largest. China’s gold-backed ETFs continue to grow as well. Investors bought 30.3 tonnes of gold in 2016 through ETFs – an almost six-fold increase in assets under management. Trading volumes on the Shanghai Gold Exchange are increasing. And interest in new products continues to increase; we believe innovation should continue to support China’s gold market in years to come.
Reproduced by kind permission of the World Gold Council. This is a slightly abridged version, please see the original at www.gold. org/research/gold-market-2017
In India, the government’s decision to remove large denomination rupee notes (Rs. 500 and Rs. 1,000) took around 86% of India’s circulating cash out of its economy. While the purpose is to replace them with newly printed notes, we believe that the liquidity squeeze could have a temporary negative effect on economic growth, and may also affect gold demand in the short term. But more importantly, we believe that the transition to transparency and formalisation of the economy will lead to stronger Indian growth in the longer term, thus benefitting gold.
Chart 2: China and Asia ex Japan and China (AxJC) will likely contribute approx. 60% of global growth in 2017* Contribution to global growth (%)
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0
Euro area China AxJC
*Courtesy of Standard Charter Research and based on their calculations. Source: IMF, Standard Chartered Research
Forecast
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 US
February 2017 |
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