Gold as an investment instrument
Before talking about the gold market, one should pay attention to the obvious problem, which sooner or later will sharply increase the attention to it as follows
to an instrument of investment. The fact is that the volume of global public debt has grown significantly in recent years – now its absolute value exceeds $63 trillion. In today’s article about what the gold market is and what role it plays for the economies of different countries.
In the next two years, in case of recession in the world economy or rapid growth of interest rates, debt problems will inevitably act as the main global risks. Historically, record debt burdens are already affecting economic growth rates, which in turn affects the ability to service debt with all its negative consequences.
Japan (237.6 per cent) and Greece (181.8 per cent) are ahead of the world in terms of public debt. This is followed by Italy. The United States is in eighth place, at 105.2 per cent. According to the latest estimates of the American Ministry of Finance, the national debt of the country is about $22 trillion. This means that for each inhabitant there is 66,000 dollars of debt. In general, America is one of the largest debtors in the world, and this is a huge risk to the overall financial stability. The onset of recession or a significant weakening of the economy will lead to increased debt service. Demand for US government bonds is falling.
However, it is not only the growth of U.S. government debt that is a problem; there is a risk of a downward trend in the stock market, which was last observed in the 1970s. It is possible that the stock market is on the verge of a bearish trend, which may last from three to five years. Even the first signs of this trend may make investors pay attention to gold and other assets, which allow minimizing risks.
Gold will help investors to secure their assets before the upcoming debt crisis in the USA. Yellow precious metal allows saving from depreciation during crises.
The S&P 500 index fell by 9.2% in December. No matter in which direction stock markets will move, which depends on many factors such as the Fed or U.S. and Chinese trade relations, market behavior will not be stable in the coming years. Gold now costs 1.326 dollars per troy ounce.
Notions, processes, facts.
In the gold market operations of insurance of financial assets, provisioning of reserves of these assets for acquisition of necessary currency in the process of international settlements, performance of financial speculative transactions are performed. The same market meets the needs in industrial and domestic consumption of these metals.
Such multifunctionality of the gold market is connected with the fact that it is not only a universally recognized financial asset and the safest means of reserving free cash, but also a valuable commodity for a number of industrial enterprises. Today gold continues to be a means of balance of payments equalization in the international market, and in the form of bullions of a certain weight.
Over the course of many years of the bullish stock market, investors who had previously purchased gold in the event of a possible war or as an insurance against the depreciation of money have lost interest in it, preferring to invest in other financial assets. But the most important shift in recent years is the renewed trend of physical gold market capacity expansion, which is characterized by the growth of aggregate demand for the bullion metal. Demand has increased from the industrial and production spheres. Here gold is purchased as an initial raw material for subsequent industrial processing into finished products: jewelry, household items, coins and medals.
One of the peculiarities of the current situation is that operations to buy and sell gold bullions have been increasingly shifting to developing countries, mainly in the Middle East, Southeast Asia and the Far East. Consumption of gold in Asia has increased in recent decades from 25% of global demand in 1990 to 50% in 2018.
The current supply and sales situation in the gold market is characterized by the fact that the growing market demand is increasingly being met not by newly produced metal, but by its removal from previously accumulated stocks. Moreover, the metal supply comes directly from the state authorities. In some countries, central banks promote gold in the market. They send the metal to the market either for direct sale or for the purpose of specific loan operations, allowing gold producers on a regular basis to supplement supplies from current production by forward sales.
On the other hand, the total production, though slowly, is decreasing. It should be noted the fall in global gold production in South Africa. The share of South Africa in global production fell to 23% against 40% ten years earlier. Today, the highest rate of gold production is demonstrated by Indonesia, which back in 1990 – e years took 19th place in the world, and in the current period – the fifth. Russia is also increasing its position.
GOLD EXCHANGE TRADING
Trade specifics and forecasts for 2019.
First of all, it is not the metal itself that is traded on gold exchanges in physical form, but the titles of ownership in the form of contracts that define the rights and obligations of sellers and buyers of a certain standard amount of gold (100 ounces, 1 kg).
A futures contract is an unconditional obligation to deliver a given quantity of gold by a specified deadline at a price agreed at the time of the transaction. An option contract gives the owner the right at any time during the contract period to buy or sell gold or a futures contract for the same amount of metal at a predetermined price. Currently, the international futures trading is concentrated in the USA: on the Commodity Exchange of New York (COMEX) and in Japan on the Tokyo Industrial and Commodity Exchange (TOCOM). Options are traded mainly at COMEX, but also on the Commodity Exchange in São Paulo, Brazil. Golden ETFs are becoming very popular.
According to analysts, there are several major trends in the world economy that will support the demand in the gold market and affect the price of the metal in 2019 – increasing political and geopolitical risks in the world as a general depreciation of money and rising inflationary expectations.
Experts assume that nominal and real rates in US dollars will increase next year, while consumer inflation will rise to 2.6% amid tough conditions on the labor market and rising wages. It is also quite probable that those irresponsible monetary incentives, which have been pumped into the global financial system since 2009, may lead to the development of an inflationary spiral, which will force investors to invest in gold.
As another possible reason for the growth in the value of gold, analysts consider the high current stock market valuation, which may lead to its fall. Naturally, with the fall of the stock market and the dollar, gold as a protective asset may grow. But do not forget that a large-scale decline in the markets will hit gold as well. In addition, the main demand for physical gold is provided by emerging economies of Asia, which in case of a large-scale debt crisis may be severely affected.
GOLD IN RUSSIA
Following the results of 2018, the Central Bank of Russia significantly increased the gold stock of the country. The Central Bank was actively buying precious metal for reserves as never before. In December 2018, another 300,000 ounces (9.33 tonnes) were purchased. For the whole of 2018, the Central Bank increased gold reserves by 8.8 million ounces, or 273 tonnes. It turns out that in 2018 Russia bought 22% more gold for reserves than in 2017. At that time, 7.7 million ounces of gold were purchased.
After the publication of data for December 2018, Russia’s gold reserves increased to 67.9 million ounces, – 2111.92 tons, and the cost of this volume was estimated at $86.90 billion at the end of the year. Now the share of gold in Russia’s international reserves is 18.5%. Deadollarization, however…