Yesterday, the World Gold Council (WGC) released a new edition of Gold Investor, its publication on gold market. What can we learn from the report?
The latest issue contains a few interesting articles about the precious metals market. Two pieces are about the key new initiatives, such as the Shari’ah standard for gold, which aims to provide guidance on the use of gold in Islamic financial products and transactions, or the suite of exchange-traded and centrally cleared precious metals products called LMEprecious.
It also includes a cover interview with the Mohamed El-Erian, the chief economic adviser at Allianz and former CEO of PIMCO, about smart investing in a low-interest world. He notes that markets have brushed off the U.S. presidential election so far, probably due to “the institutional checks and balances built into the US political system” and “faith in the ability of central banks to repress financial volatility”. However, central bank effectiveness is probably waning, which should be good news for the precious metals market.
When it comes directly to gold, El-Erian argues that gold “is increasingly recognized by the investor community” in the current interest rates environment. This is because ultra-low interest rates induce excessive risk-taking, while “gold can play an important role in overall risk mitigation.” Indeed, Osamu Hoshi – in another piece included in the latest issue of Gold Investors – points out the growing appeal of gold in Japan, as with global interest rates at historically low levels, investors stopped to worry that gold is a non-yielding asset.
The yellow metal can also “provide a notable upside should the enormous amount of central bank liquidity injection gain traction and result in higher inflation, be it actual or expected”. This echoes the opinion of Simona Gambarini, a commodities analyst at Capital Economics, who wrote in the article entitled “Where next for gold?” that Fed tightening does need to be bad for gold, as rising inflation would keep real interest rates low.
However, El-Erian advises investors to “size their gold allocation in a manner that enables them to stomach considerable mark-to-market price fluctuations” in order to avoid “risk of doing the wrong thing during periods of unsettling market volatility”. Thus, he believes that a 5-percent strategic allocation would be appropriate.
The take-home message is that the WGC released an autumn issue of Gold Investors. We did not manage to discuss all articles, but we will catch up with it in the following days. Anyway, the cover piece is an interview with Mohamed El-Erian, considered as one of the top 100 global thinkers. He argues that ultra-low nominal interest rates are positive for the gold market, as they put us in uncharted waters and increase uncertainty. This is when the shiny metal should enter (however with an appropriate allocation), as it improves risk-mitigation attributes of investment portfolios.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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