On Thursday 2nd November, the Bank of England raised UK interest rates for the first time in over a decade. This doubles the interest rate, with a rise from 0.25% to 0.5%, re-establishing the rate, which was cut in June 2016 due to the Brexit decision. The 0.5% rate had previously been in place since 2009 following the financial crisis.
Mark Carney of the Bank of England has announced a doubling of UK interest rates
Why the increase?
The Bank has raised interest rates primarily to stifle surging inflation at a time of stagnating wage growth. The UK Consumer Prices Index currently stands at 3% which is its highest since April 2012, some Analysts have predicted this could rise to over 5%. This decision by the bank is aimed at calming down UK spending by reducing the demand for services and goods.
The inflationary rises are largely caused by the weakness of £ sterling following Brexit and also a slowdown in the UKM economy. If interest rates were kept at 0.25% it would only make inflationary pressures worse in the minds of the Bank.
Impact of the interest rate rise on consumers
The impact of the rate rises is obvious in that borrowers suffer, whilst savers benefit! This is because many millions of UK mortgages and savings accounts are based on the base rate of the Bank of England. Within hours of the announcement, the FT reports that Lloyds Bank, Royal Bank of Scotland, Santander, TSB and Yorkshire Building Society had all revised changes to both their mortgages and savings account rates.
Outlook for borrowers
In the UK, 43% of homeowners have either variable or tracker type mortgages, both of which will see an almost immediate increase in mortgage rates. This is bad news for UK households with mortgages in the run-up until Christmas.
Outlook for savers
Conversely, the news for savers is welcomed as many will see an immediate 0.25% increase in their variable rate based savings accounts. This will particularly benefit many pensioners in the UK.
Gold investment for savers
Gold and other precious metals investment are often said to be a hedge against inflation, we have previously written about this ourselves here. Now then, could be a great time for savers to invest in gold with some of their increased income from savings accounts following the rate cut. Diversifying investments (particularly in times of inflationary pressure) is always a wise idea.
Low priced investment options
For borrowers facing an interest rate rise, all is not lost! Gold and precious metal investment needn’t cost a fortune, below we list two investment options all costing less than £300 each at the time of writing:
If there is any aspect of the UK rate rise you’d like to discuss about precious metals investment, then don’t hesitate to call us on 020 7060 9992 for a friendly discussion. Also, feel free to email us using our contact form for an early reply.
On 2nd June 2015, the Royal Mint launched “Signature Gold”, which is both a brand name and trading service they provide. Here we explore what Signature Gold is, how to buy and sell it as well as storage and legal aspects of this form of gold investment.
About Signature Gold
The Signature Gold service requires a personal account with the Royal Mint, which will require scrutiny/approval before the service can be used. Accounts can be set up and the service used at http://www.royalmintbullion.com/. The service is available 24 hours per day x 365 days per year.
A management fee is charged for the service, this is 0.5% + VAT per annum and is charged quarterly in arrears. The fee will be based on the average daily value of total gold held by the customer in the vault.
Signature Gold is a form of fractional gold investment, where investors buy a fraction of a 999.9 fine gold bar. The Royal Mint buy 400 oz. gold bars specifically for this service, which comply with the LBMA Good Delivery Standard. The service was introduced as an entry level gold investment product with investments starting at only £20.
Signature Gold is a form of fractional gold bar investment and is available from the Royal Mint
The customer deals with the Royal Mint from start to finish, no other third parties are involved. There is no exposure therefore to any form of counterparty risk via this service.
Buying and selling Signature Gold
Customers of the service buy gold based on value rather than weight, e.g. £20 rather than a coin or by the ounce, etc. Gold bought through the service can be sold at any time, once sold gold is available instantly through the customer’s personal account with the Royal Mint.
Gold is bought based on prices published on the website, which are linked to the current gold price on the open market. Gold bought or sold is priced to the nearest 0.001 oz.
“The Gold price today & investing in gold medium to long term” a Physical Gold Ltd. YouTube video.
Storage and legal aspects
Customers do not have physical access to their gold, which is stored in the Royal Mint’s vaults in London. The Royal Mint always has more of the gold bars stored in the vault than have been bought by customers. Customers have full legal ownership over every ounce of gold they buy.
Should you buy Signature Gold?
In our February 2017 article “the do’s and don’ts of buying gold” we recommended, “not buying large amounts of fractional coins”. This advice still stands and there are more effective physical gold investment strategies such as buying gold coins and gold bars.
Contacting Physical Gold to discuss fractional gold investments
We can only say so much in an article as everybody’s circumstances are slightly different, so call us on 020 7060 9992 for friendly and impartial advice. Emails can be sent via our contact page, we look forward to hearing from you.
So, we’ve woken up this morning to the shock Brexit result that the UK will leave the European Union. The kids still needed to go to school, the sun was out, the birds were still chirping and the world carried on. Realistically, will we see much change to our daily lives, or will leaving the EU have less impact than we think?
Panic from the shock
The campaign saw opinion polls swing one way, then the other, over the past few months, suggesting a lack of certainty in the result. However, over the past few days, polls suggested a win for the remain campaign. The Pound strengthened, equity markets stabilised and gold fell. The fact that this result is a shock to the expectation of the markets will intensify its impact.
The immediate impact of Brexit
It’s impossible to predict the medium to long-term repercussions of Brexit, but we can, at least, see the immediate impact. The Pound has fallen to its lowest level since 1985 and the FTSE has suffered losses of over £100bilion overnight. Significantly, the Prime Minister has announced his resignation, which leaves the country in political uncertainty. The gold price has acted as a useful barometer of expectations and reactions over the past few months, and overnight it rose by 15% for UK buyers.
Longer-term volatility
Outside of electing a new prime minister, we may not feel much has changed. We are still members of the EU; it is the process of leaving which has begun. The claim is that this process can take 2 years. However, Professor Michael Dougan, one of the UK’s leading EU law experts, predicts the withdrawal and negotiation could take many years. Switzerland is still discussing certain points, after signing an agreement in 1972. This protracted process will cause an extended period of uncertainty in the UK, and globally. We may also see changes politically as the anti-establishment vote gains confidence, causing further instability.
Financial impact
Without a crystal ball, we don’t know if Brexit will have a negative or positive impact on our cost of living and prosperity. Both sides have claimed we would be better off. The worry is that most business leaders, including those outside of the UK, think leaving will harm our finances. Certainly, the reaction of the markets supports this view.
The worst part?
However, it’s the prolonged uncertainty we now face, which may have the greatest effect. Financial institutions have already put the deals, which oil the wheels of our economy, on hold. The economy will likely feel a reduction in liquidity, as banks retreat into their shells. Over the coming months and years, it will be interesting to see the reaction of global institutions, who may decide to leave the UK at the cost of thousands of jobs. The UK has the 5th largest economy in the world, so this overnight change will send ripples across the globe. This isn’t something that can be swept under the carpet.
Gold’s role
Instability and uncertainty are the driving motivations for people to buy gold. It acts as a hedge and portfolio insurance when markets suffer huge events. The fact that the gold price has spiked so dramatically overnight is reassuring that it’s fulfilling its role as a ‘safe haven’.
Those who like the security of owning a tangible asset – like property – may now be concerned house prices could fall. We’ve compared gold investment to property to analyse where the markets may be heading.
As we’re likely to have years of uncertainty, gold should continue to act as a long-term balance to your wealth. And in the UK, we should benefit two-fold:
– First, the underlying gold price has moved up sharply.
– Secondly, the value of the Pound has fallen dramatically. Once you convert the $ price into Sterling, gold holdings have risen 15% overnight and, incredibly, more than 35% this year alone.
The economic impact of Brexit
As the Brexit saga moves into 2018, gold should continue to perform well. British industry has had yet another dismal year and the current GDP growth rate is inching along at a snail’s pace of 0.4%. As we move into 2018, there doesn’t seem to be an amazing economic recovery in sight. Brexit may close the gates across the border, but the actual impact that it will have on EU industrial relations with Britain is still unclear. However, analysts have projected a grim view of 2018. Expected profit from Britain’s largest companies is now expected to grow only by 7.2%, dashing hopes of a 19% growth projected earlier. Many companies have put their plans on hold and some are contemplating moving operations to other parts of the EU.
That’s not all….
Meanwhile, the Financial Conduct Authority chief has warned that unless there is clarity on the exact impact of Brexit by the end of the year, several companies may ship out of London next year to rival EU cities. Certainly, Berlin comes to mind as a hot favourite. The German capital is vibrant, young and home to several start-ups. The city champions innovation and is fast becoming a centre of economic growth. Goldman Sachs has already taken up 8 floors of a new office in Frankfurt, and the BBC earlier reported that the Bank of England has predicted that up to 75,000 financial services jobs in London could be at risk.
Invest in gold
When it comes to gold, however, pundits believe that Brexit fears are inconsequential. Investors will probably hedge their risk by investing in gold to hedge against their European woes. The spot price of gold appears to be currently hovering around the $1250 mark, with December still left in the balance. There is hope that the precious metal may rally a bit further on the back of Christmas demand. However, the real rally for gold may come in 2018. This will depend on the performance of greenbacks against the Euro, demand from India and China and of course, Brexit is likely to play a role in the mix as well. Another factor that can impact the US dollar is the rise of cryptocurrencies like Bitcoin. With more and more people investing in crypto-currencies, some investors may turn to gold to hedge, if the going gets too tough for them in 2018. All in all, it should be an interesting year ahead for gold.
If you don’t already own gold, but feel concerned about the diminishing value of the Pound and falling equity markets, then it’s never too late. We discussed the bigger picture in our blog last month: Are Gold and Silver still good value?.
It’s simply a case of heeding the view of the experts and allocating some of your wealth into physical gold so that whatever the future holds, you’ve spread your eggs into different baskets. If you’d like to find out more about this type of investment, why not Download our free guide to investing in gold and silver or give us a call today to discuss your options.
Take a look at the dollar price chart here, and what do you notice? Do you see a particular pattern?
Since 1975, the dollar climbs for approximately five years, then catastrophically crashes. Look closely at the last few years…the dollar has been climbing since 2010. Based on historical data from Macrotrends, this chart shows a cyclical pattern and experts at Scottsdale Bullion, in the U.S, are predicting a MAJOR dollar crash is on the horizon, and we’re inclined to agree.
Following continual gains over recent years, their opinion is that in 2017 or 18 there is going to be a MASSIVE DOLLAR DROP! That means that now, more than ever, you need to take action to protect your wealth.
You can protect yourself from a dollar crash by diversifying into different asset classes to reduce your overall investment risk. Experts generally advise holding between 10 – 15% of your overall portfolio as Physical Gold. This is because gold tends to go up when everything else goes down – giving investors protection against geopolitical events, uncertainty and inflation.
You may think that this isn’t such as great idea as gold has been quite volatile itself recently, but you wouldn’t think twice about insuring your car or your home, so why not insure and protect your assets?
After a Dollar crash, what would happen?
In the U.S inflation would rise, unemployment would suffer and interest rates would be sky high. This could send the USA back into a deep recession. Investors would flock to other assets; such as commodities and gold, or other currencies such as the Euro. Globally, there would be continued substantial economic turmoil.
And without a doubt everyone would agree that here in the UK, we’re already experiencing a period of extraordinary political uncertainty. A dollar collapse would add further insecurity, and to counter this kind of turmoil, you must think ahead. Keep your assets liquid and diversified so you can shift them as needed.
But haven’t the Fed just put up interest rates?
Yes. Interest rates were increased to 1.25% by the Federal Reserve on 14th June 2017. Chairperson, Janet Yellen cited an improved jobs market, with the unemployment rate down to its lowest in 16 years.
This was the third quarterly rise in US interest rates and more importantly, the Fed intend to continue raising rates and unwinding their vast Quantitative Easing (QE) program. The open market committee expects rates to increase once more in 2017 and a further two times the following year.
All seems well then….
On the surface, this sounds great. Starting the process of buying back the Government issued bonds which make up the giant QE program, and an economy which seems to be steadily growing.
However, the committee aren’t unanimous in this optimism. Neel Kashkari, tipped as a future chair of the Fed, objected and warned against increasing rates, for fear of damaging the fragile recovery.
The economy is in a delicate state, which can easily be tipped into catastrophe. Already, the average American’s monthly mortgage costs have increased significantly over the past year. With further rate increases promised, many will struggle to pay for their homes. Certainly, the public will have less disposable income to spend on goods and services which could put a massive crimp on the very spending which the QE program was designed to encourage. With the Fed re-purchasing bonds to unwind the program, the equation could well have a huge negative impact on the growth of the economy.
Stronger Dollar in the short term
Increasing the US interest rates will initially strengthen the Dollar, but the medium term impact could push the US back into recession. The economy is more globalised then at any point in history.
A strong Dollar means US exports are increasingly expensive for the likes of the UK, Europe and Asia to buy. With Brexit in full swing, the UK lacking a majority Government and China’s economy slowing to a halt, the Fed may be underestimating quite how fragile the global economy is. An initial rise in the Dollar could well spark a massive fall in Exports and start the Dollar crash cycle once again.
Updated India GST
Historically, gold prices and gold regulations in foreign markets often have a large impact on gold prices throughout the world. And when these new rules take effect, they can also affect gold buyers globally. Such is the case with new tax rules in India, the Goods and Services Tax (India GST) taking effect in July, which will replace India’s often lamented, (and difficult to navigate) tax laws.
India is renowned for being one of the worlds largest gold markets, with mining.com suggesting in 2015 that over 20,000 tonnes of gold is privately held in India as coins, bars and jewellery.
A new, simpler nationwide Goods and Services Tax, which is the Indian version of VAT, is the largest financial reform that India has seen in decades.
However, because the states will lose their autonomy on how much they can charge, there is some fierce opposition. And some businesses are also challenging the reforms, as they will now have to give comprehensive accounts of their sales at state and central level.
But will this new GST have a positive impact on the global gold market price or could it mean higher prices for gold consumers?
Initially, the answer is higher prices, as gold buyers in India will see a slightly higher tax rate, but this is due to the gold market going through a period of adjustment. Once corrected, the World Gold Council predicts that the net global impact of this new tax rule should be a positive one.
The WGC report goes on to suggests that Indias Gold market is becoming more transparent and ordered, with a number of factors set to improve and therefore have a positive impact on the price of gold:
Improved Supply Chain efficiency
Many firms throughout the industry are adjusting their supply chains, making them more efficient, which will help to bring purchase prices down.
Merging of industries
Its likely that there will be more industry consolidation with the new GST, which will be good news for this highly fragmented market. In India, small-scale operations currently hold 95% of the industry’s retail market. But the new tax rule means that its a more level playing field, where larger companies will be able to gain more of a market share and accelerate the speed of consolidation.
International Gold Flows
Gold exports are expected to increase. The new India GST offers tax incentives, which should also help increase the flow of bullion rather than dor, which has historically been a market favourite in India. An increase in the flow of bullion in India could lead to lower physical gold prices in the US, UK and other parts of the world market.
Boosting the Economy
The tax system in India is currently very complex, often double taxing, creating barriers to the movement of gold. But the new GST should change that and bring in more goods, services and capital to the Union. Having one single rate apply across the board will, remove the double taxation issue and should boost economic growth, which will lead to better trade deals and a more positive gold market for us here in the UK.
Overall, the new Indian GST, although drastic & disruptive to begin with, should have a positive effect on the gold market, boosting the economy whilst making the market in India more transparent. This should, in the longer term, support the global gold market and be of benefit to gold buyers around the world.
You can view for more information on anything gold related, contact us here at Physical Gold or click here to buy gold online today.
Pot of Gold Discovery
An incredible collection of valuable gold sovereign coins has been discovered hidden in an old piano.
The piano, originally sold in Essex in 1906, was sent for retuning and repairing by the current owners, when the life-changing hoard of coins was discovered hidden inside it.
Found just before Christmas, experts believe the coin collection was probably carefully hidden there as far back as 1915, and the value is said to be life-changing. It includes an undisclosed number of full and half sovereigns, dated 1847 to 1915.
Peter Reavill, the Finds Liaison Officer at Shropshire Museums said it had “The potential of yielding a life-changing sum of money. It’s not the sort of money you would tuck away and forget,” he said. “It is a lifetime of savings and it’s beyond most people.”
Due to conclude later this month, the inquest has heard how the piano, made by Broadwood & Sons of London, was initially sold to a Messrs Beavan and Mothersole of Saffron Walden, Essex, in 1906.
Ownership of the piano between 1906-1983 is a mystery, with the coroner seeking information about its location during that period.
Declared as treasure
It will be decided on April 20th whether the ‘pot of gold’ can be declared as treasure. The conclusion has been delayed to allow more time for anyone from the Essex area, with information about ownership of the piano, to come forward.
If the coroner believes they have been hidden with the intent of future recovery, the objects will qualify as treasure and be the property of the Crown. However, the Crown’s claim will be void, if the original owner or their heirs can establish their title to the find.
Daniel Fisher of www.physicalgold.com, said, Its not the first time I’ve heard of obscure places to store gold. Full sovereigns are worth anything between 250 – 300 each, so a significant find like this means someone out there is due to receive quite a substantial pot of gold.
Gold Market price performance
Despite post-Brexit uncertainty and pessimism, overall 2016 was a good year for the price of Gold, showing strong gains up until September (up 25%) but then falling in Q4, averaging out with a price increase of 8% for the year. For UK holders of gold, the Brexit-induced weak Pound boosted this performance to an incredible 30% gain.
Investors took advantage of the lower prices in Q4, leading to a surge in the bar and coin market bringing the annual total sales to 1,029.2 tons (-2% yoy). This was the best quarter for gold bars and gold coins since Q2 2013; a welcome relief for many, as the early lack of demand had some investors concerned. Europe is the second-largest bar and coin market in the world, but China performed strongest in this sector with an annual increase of 25% (it’s highest since 2013).
Gold demand
The demand for gold-backed ETF’s was the second-highest on record (and highest since 2009), driving these price gains and contributing to the increase in global demand for gold by 2%.
India’s gold market suffered in 2016, and consequently, the year saw a seven-year low for jewellery demand. With weaknesses also in China, these contributed towards a global 15% decline. Strikes, regulations, de-monetisation and higher prices meant that Indian demand alone was 148.3 tons lighter than 2015 – the biggest yearly decline recorded by The World Gold Council.
Due partly to the pressure on FX reserves, Central Bank purchases around the world slowed to 384 tons (down by 33%). With Russia, China and Kazakhstan accounting for 80% of the purchasing.
Despite first-half losses in the Technology sector, there is good news with more new uses of gold being discovered; including sensors made from gold nanoparticles and gold bonding wire in the increasing use of fingerprint and iris sensors. A 4% increase in technology Gold usage in Q4 minimised losses in this sector to 3% for the year.
Prospects for 2017
It’s too early to suggest what this means for 2017 but the 2016 increases are mainly due to unsettled conditions around the world, which are undeniably set to continue into 2017. So if you haven’t done so already, it may be worth considering a financial review of your assets. With low interest rates and a busy electoral calendar in Europe, the outcomes of Brexit still undetermined and a Trump administration causing problems both domestically and internationally, it seems 2017 is certainly going to be another year of uncertainty!
16 Jan 2017
In 2016, investors around the world returned in large numbers to the gold market, as a combination of macroeconomic drivers and pent up demand kept interest in gold high. As we start the new year, there are some concerns that US dollar strength may limit gold’s appeal. We believe that, on the contrary, not only will gold remain highly relevant as a strategic portfolio component, but also six major trends will support demand for gold throughout 2017.
What’s in this report?
The World Gold Council’s Outlook comprises four sections. A section on major trends that will support, in our view, gold performance this year. And three short sections from notable economists, gauging the economic outlook for the US, Europe and Asia, respectively. Our guest contributors are:
Jim O’Sullivan, Chief US Economist at High Frequency Economics, dubbed ‘most accurate forecaster in America over the past 10 years’ by MarketWatch
John Nugée, renowned economic and geo-political commentator and former Reserves Chief Manager at the Bank of England
David Mann, award-wining economist and Chief Economist for Asia at Standard Chartered Bank.
Using the economic perspective from our guest economists as a backdrop, we believe there are six major trends in the global economy that will support gold demand and influence its performance this year:
Heightened political and geopolitical risks
Currency depreciation
Rising inflation expectations
Inflated stock market valuations
Long-term Asian growth
Opening of new markets.
Thursday 8 December 2016 3:46pmby David Brett (Schroders)
Gold is coveted by investors for its rarity. As a precious metal with limited supply, it is seen as a store of value when the real value of other assets, and currencies, can be manipulated.
But fundamentally, its high worth is underpinned by its usefulness and attractiveness. Not only is it highly malleable but it also conducts electricity, given rise to many industrial uses. Its visual appeal, worn as jewellery for millennia, is more obvious.
A brief history of gold
Gold was used as a form of currency as earlier as 550 BC when King Croesus minted coins in what is now Turkey. But the adoption of the gold standard in the late 1800s, cemented its value in modern day finance. This was when most major nations fixed the value of their currency to the gold price.
In recognition of golds importance to the global financial system, the Federal Reserve was created in 1913 to help to stabilise the gold price and currency values.
Amid the turmoil of the 1930s Great Depression, some countries abandoned the gold standard in 1931 in the UK and 1933 in the US. The gold market even closed during the Second World War.
Afterwards, the gold standard was readopted at the famous Bretton Woods agreement, reached to help with economic stability as the post-war rebuilding process began.
The gold price remained pegged below $200 an ounce for much of the last century.
The gold standard was abandoned entirely in 1971, allowing currencies to move freely against each other.
Inflation and geo-political concerns in the 1980s saw gold spike above $400 for the first time. But the rally was short lived. Prices were left languishing for nearly two decades.
It was only in the new millennium that demand steadily returned, partly because some central banks slowed their selling of gold reserves.
But the biggest gains came amid the financial crisis of 2008 and the years that followed. This was mainly in response to the substantial programmes of quantitative easing undertaken by central banks.
The theory was that this would create inflation, and gold is considered a store of value at such times, rising with, or ahead of, wider price increases.
Three reasons investors hold gold
1. Scarcity
Gold is scarce, durable, versatile and tangible. As such, it maintains its value and is considered a safe haven investment.
2. Protect global purchasing power
Gold is seen as a store of value during times of persistent deflation or extreme inflation. To some, it is considered to be a highly-valued global currency, a reputation earned in the gold standard period.
3. To diversify
The price of gold often behaves differently to stock and bond markets. It is possible that when a portfolio is suffering because of shocks for shares or bonds, that the gold price can rise, or vice versa.
Four reasons investors might sell gold
1. Rising interest rates
Rising interest rates damage demand for gold, particularly if central banks are trying to
control inflation. Gold is perceived as offering protection from inflation so central bank success in controlling it might hold back the price.
2. Strong US dollar
Gold is valued predominantly in dollars. If the dollar is strong it costs more for international investors to buy therefore demand might fall.
3. Pace of gold production
Oversupply can dilute the price of gold, just like any other commodity.
4. A growing need for income
During periods when interest rates are low investors will look for alternative higher yielding investments such as shares. Gold provides no income and may fall out of favour. This factor may have contributed to falls in the price in recent years.
How do I know if gold is cheap or expensive?
Gold is notoriously difficult to value. It provides no yield, coupon, rent or profits therefore it is a difficult asset for investors to value compared with shares or bonds, for example.
Investors are left trying to judge a number of factors, explained above, that feed into demand for gold. It is understandable that the price has seen periods of extreme price volatility.
Without the usual valuation metrics that might be applied to traditional investments, working out when might be a good time to buy can be difficult. This has increased focus on alternative measures.
The gold-silver ratio is one such measure, simply comparing the price in ounces for each precious metal.
In 2000, the ratio was 50 to 1, with gold 50 times more expensive than silver.
A higher number suggests gold is more expensive compared to the silver price, a lower number suggests it is less expensive.
At the time of writing the gold/silver ratio is just above 70.
The ratio is a niche tool used by traders as one way to work out when to move in and out of gold.
How much gold should I have in a portfolio?
Like any investment portfolio, if you have just one investment in it then you leave yourself exposed to heavy losses should the investment fail. A balanced portfolio will hold shares, bonds and perhaps commercial property, depending on the aims, risk appetite and timelines of the investor.
The World Gold Council claims modest allocations to gold of 2% to 10% could protect and enhance the performance of an investment portfolio.
What is the outlook for gold?
Having risen sharply since the turn of the millennium and peaking after the global financial crisis in 2011, gold has retreated.
Given the gains that had come before, some market watchers were not surprised by the slide in the price.
If the next chapter in the story of the global economy involves extreme inflation or deflation, then gold may perform well. Or indeed, if there are severe market shocks.
Other less dramatic scenarios may be less positive for gold.
The table below offers explanation on how the gold price has moved during different global periods, although these patterns are not guaranteed to be repeated. As canny investors know, past performance is not a guide to the future.
Ultimately, the price of gold is driven by the mood and mindset of investors, said Matthew Michael, Product Director in Commodities and Emerging Market Debt.
There’s any number of reasons that can drive investors to buy it. Faced with uncertainty, potentially significant inflation, currency weakness they tend to buy gold.
Fund manager views
James Luke, Schroders Metals Fund Manager, said:
Is the global environment now bearish for gold? We don’t think so, not even in the US. Prospects of a hike in interest rates have been rising faster than inflation expectations, which is bad for gold in the short term but we doubt this will continue for long.
With energy prices rising, the US labour market tightening and building expectations of hawkish US trade policy, inflation expectations could build rapidly, supporting gold.
The potentially positive economic elements of a Trump presidency have been priced in by markets. The potentially negative elements, including higher inflation, higher geo-political risks and increased protectionism have been largely ignored.
And as we’ve said many times before, gold remains an under-owned hedge against global central bank credibility and under-appreciated global risks.
Potential inflation, currency and financial market outcomes globally are arguably more extreme now that at any point since the end of the Second World War.
2 Dec 2016
The Indian government has been trying to reduce its citizens demand for imported gold through a number of means over the last few years. This is part of a wider crackdown on the currency used in the black market, that included the withdrawal and replacement of its two largest-denomination banknotes in early November. The strategy will likely have some unintended consequences if we take our cues from the events of 1910.
Indians famous love for gold has created serious and ongoing economic issues for the nation. In 2011, Australian investment bank Macquarie estimated that 78% of Indias household savings were held in gold.
In effect, this means that India has a dual currency system where people choose to save mostly in gold rather than rupees. This is unlike any other major economy and begs the question: how do you wean a population off a precious metal?
Bling and buy sale
Building up savings in gold rather than deposits in a bank creates a permanent drag on Indias growth. This happens because the savings do not increase the available funds for lending within the banking system. One reason it is so difficult to put this gold to work as investment capital is that 79% of it is bought as jewellery, rather than bars or coins.
India is the worlds largest consumer of gold jewellery at nearly 700 tonnes in 2015 according to the GFMS Gold Survey 2016. However, it mines less than two tonnes of gold a year. This means India must import gold worth US$25 billion each year, pushing up its current account deficit and pulling down the value of the rupee.
In 2015, prime minister Narendra Modis government introduced a Sovereign Gold Bond scheme which allowed gold holders to swap their gold for an interest-bearing bond. At the end of the bonds life, investors would effectively be returned the same amount of gold. This move reduced the minimum amount of gold necessary to participate in such a scheme to two grams. As of November 2016, 14 tonnes of gold had been subscribed to the two gold bond issues, with another five tonnes collected through the older gold monetisation scheme (which has a larger minimum deposit of 30 grams).
However, relative to Indias estimated privately held gold stock of 20,000 tonnes, these deposits represent tiny amounts and it still doesnt seem like a solution.
Unintended consequences
An alternative would be to permanently reduce gold imports. To that end, in 2013, the government started to increase import taxes on gold imports to 6%; this now stands at 10%. However, falling gold prices during that period meant that there was still a 12% increase in gold imports in 2015 as consumers snapped up what they saw as bargain prices.
And here is where we go back more than 100 years to see how this all worked out last time. You see, India has battled precious metals imports for quite some time. In 1910 the government of India increased the import tariffs on silver from 5% to 11%. A market report in 1912, by Pixley & Abell, a gold wholesaler, pointed to a 28% fall in silver demand in the Indian bazaars in the three years following the increase. They attributed this to not just a fall in demand for silver due to tax increases, but also a substitution of gold for silver in peoples savings as gold became more attractive on a relative basis.
Between 1910 and 1930 net imports of silver in India fell from 98m ounces to 31m, according to British Geological Survey reports. After this time India gradually became the worlds largest gold consumer, a position it finally lost to China in 2015.
And it seems a return to silver as a major investment for consumers in India may be on the cards. Following the recent import tax hikes for gold, 2015 saw Indian silver imports grow to almost 8,000 tonnes, 14% up on the previous 2014 record. At the same time, demand for gold jewellery, which accounts for 75% of all Indian gold demand, is down 30% for the 12 months to the end of September 2016, according to the World Gold Council. This points to a possible shift back to silver as a more prominent investment in India.
Gold makes up the vast majority of Indian jewellery sales. But the graph below shows the rapid growth in silver jewellery demand in India, which is up over 600% in ten years, relative to the marginal growth of only 25% in gold jewellery demand.
Of course, silver is not the only precious metal investment option available. If investors want a more compact form of wealth, then platinum, worth 56 times more per ounce, might suit. But a swap to silver in India, as was the norm pre-World War I, seems more likely and could have a major effect on prices. For a sense of scale, the Indian gold jewellery market in 2015 was worth US$25 billion, while the total world silver jewellery market was worth only US$3.5 billion.
Even a small substitution from gold to silver would result in a massive increase in the price of silver. A 10% reallocation from gold jewellery investment to silver in India would nearly double world silver jewellery demand. Mines and other sources would not be able to fill the gap immediately; prices would rise, further fuelling demand and creating a new, shiny headache for those trying to marshal Indias unusual economy.
Gold Information
Live Gold Spot Price in Sterling.
Gold is one of the densest of all metals. It is a good conductor of heat and electricity. It is also soft and the most malleable and ductile of the elements; an ounce (31.1 grams; gold is weighed in troy ounces) can be beaten out to 187 square feet (about 17 square metres) in extremely thin sheets called gold leaf.
Silver Information
Live Silver Spot Price in Sterling.
Silver (Ag), chemical element, a white lustrous metal valued for its decorative beauty and electrical conductivity. Silver is located in Group 11 (Ib) and Period 5 of the periodic table, between copper (Period 4) and gold (Period 6), and its physical and chemical properties are intermediate between those two metals.
16 Jan 2017
Thursday 8 December 2016 3:46pmby David Brett (Schroders)
