Why is Gold so interesting at the moment

Data is used everywhere these days. The upcoming USA presidential election is a perfect example of this. Polls are updated literally on an hourly basis, to see if Trump or Biden will become the next US president. As with weather forecasts, which also rely on data, polls are not always correct (just ask Hillary Clinton), but it definitely helps us to make more informed decisions. I don’t want to discuss the upcoming US elections this week, as more than enough time and reports have been dedicated to it. No, I want discuss a secondary subject related to these elections, namely Gold, and a few very interesting phenomena currently manifesting in the data surrounding gold.

Is red the new gold?

Since the Bretton Woods monetary system came to an end in 1971, the need for Central Banks to purchase gold also basically came to an end.  It is for this exact reason that the USA still has the same number of tons in gold reserves today, as they had in 2006. And Britain took it one step further by selling nearly half of their gold reserves between 2000 and 2002, leaving them outside of the top 10 countries with the largest gold reserves. There have been many debates on whether a gold standard will make its appearance again at some point in the future. But what really interests me, is the fact that Russia and China have both been massive gold buyers over the last decade.

Graph 1: Central Banks listed according to the largest gold reserves (source: World Gold Council)

Of the 5 172 tons in gold that have been purchased by central banks over the last 10 years (up to 30 June 2020), Russia bought 1 544 tons, and China bought 893 tons. That means that nearly half of all central bank gold purchases were made by these two countries. It makes you wonder why…

Passivity also helped

As an investment, gold still tickles the fancy of prominent investors, but not necessarily in the form of direct gold investments. Even Warren Buffett recently made headlines by announcing that Berkshire Hathaway purchased 20.9 shares (valued at roughly R12.5 billion) in Barrick Gold. But when it comes to gold investments, the purchase of gold bars remains the most popular.  Of the 13 280 tons in gold demand for investment purposes over the last decade (up to 30 June 2020), 66% was purchased in the form of gold bars. But the interesting part of this doesn’t lie in the 66%. It lies in the fact that only 11% of total demand was purchased by exchange traded funds (ETFs). Why is this so interesting?

Graph 2: Global gold demand as investments between 31 December 2009 and 30 June 2020 (source: World Gold Council)

Well, although ETFs only made up 11% of gold demand over the last decade, 56% of total gold purchases for investment purposes, were made by ETFs in the last 12 months ended 30 June 2020. Is this just the herd-effect, or perhaps much wiser purchases? Only time will tell.

A thing of beauty is a joy forever, as long as you can afford it

It is true that gold has become a political play ball over the years, but its main use is still for jewellery. More than 50% of all gold purchases over the last 10 years (ending 30 June 2020) have been made for the purposes of jewellery manufacturing. I.e. of the 1 110 tons in average quarterly gold demand, about 555 tons per quarter was purchased for jewellery manufacturing. The question I have, is what effect Covid-19 had, and still may have, on jewellery stores and manufacturers over the next few months.

Unfortunately, not unlike the rest of the world economy, the effect has been incredibly negative. For the first quarter of 2020, gold demand for jewellery declined to 321 tons, and in the second quarter, it declined even further to 252 tons. This explains why a share like Richemont is still trading 25% lower in Swiss Franc terms today (as at 19 October 2020) than its share price of five years ago (October 2015). Can this create a possible investment opportunity for investors? I definitely think so.

It doesn’t matter if you see gold as an investment or a bubble waiting to explode, the fact that it HAS to be monitored, can no longer be denied. The data simply shows to many things brewing under the surface.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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