Gold Remains Haven

Two weeks ago, the London Bullion Market Association published a new edition of its quarterly journal called “Alchemist.” What can we learn from this publication?

Gold Remains Haven In The Turmoil Of Political Times

There are many interesting articles about the gold industry, but the most important text is probably Daniel Marburger’s article entitled “Gold Remains Haven in the Turmoil of Political Times” which explores the unique diversification properties of the yellow metal. Let’s analyze it.

The starting point of the article is the assessment that the sure bets are no longer a certainty in the current unpredictable world. As markets are fragile, investors should consider insulating their investments from a market shock by taking money out of the stock market or moving it into low-risk assets. One of them is gold, which has indeed distinctive properties as an asset class, as the yellow metal “is a solid, tangible and long-term store of value that historically has moved independently of other assets.” Thanks to these features, gold remains important for the global economy and for investors of all levels.

Indeed, the author points out the fact we continuously repeat: gold is an excellent portfolio diversifier, as it

“is a highly effective vehicle of diversification and risk management because it is independent from other asset classes. Gold enhances portfolio performance while reducing losses in times of economic turmoil. For example, during periods of financial uncertainty, when equity indices tend to fall sharply and volatility increases, gold’s volatility typically remains much lower than that of equities. In general, therefore, it consistently exhibits low to negative correlation with mainstream assets as well as alternative asset classes.”

Another important gold’s feature is being a hedge against inflation, as, historically, gold preserves wealth in periods of a declining U.S. dollar and accelerating inflation. You can think of it as a special case of portfolio diversification properties.

Demystifying London’s Gold And Silver Vault Holdings

The second interesting article from the latest edition of the Alchemist we would like to analyze is the piece entitled: “Demystifying London’s Gold and Silver Vault Holdings” written by Neil Harby and Joni Teves. The article starts with the note that London is the key gold trading centre in the world: in March 2017, $18.1bn worth of gold was cleared on average each day of the month. These trading and clearing requires the physical holdings of precious metals held in the London vaults.

According to the new statistics about aggregate physical holdings, which the LBMA has recently started to publish, 7,449 tons of gold was held in London at the end of March 2017 at vaults of seven private custodians (four security carriers: Brinks, G4S Cash Solutions, Malca-Amit and Loomis International Ltd; and three clearing banks: HSBC, ICBC Standard Bank and JP Morgan) and of the Bank of England. Actually, gold holdings at the BoE account for the bulk of the metal physically held in London, which suggests that “over the past year, an average of about 2,945 to 3,450 tons ($119-$139bn) of investment-related gold was held in London”, including around 1,485 tons of metal (about $60bn) held on behalf of ETFs.

Unfortunately, the newly launched data series covers period only from July 2016 through to March 2017, but it is important step towards more transparency in the London gold market. The availability of vault holdings data should allow for better insight into the development in the gold market, which could enable better investment decisions.

The take-home message is that the new edition of “Alchemist” was released this month. Two articles caught our attention. The first one points out the gold’s unique portfolio diversification properties which explain why the yellow metal is purchased by investors in uncertain times, while the second explains the new statistics about the London vault holdings. Investors should remember that $18.1bn worth of gold is cleared each day in London – now, given the high liquidity of the gold market, it should be clear that annual mining or jewelry demand reported by the World Gold Council do not affect the gold market.

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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