23 Mar The Rush for Gold (Part 2)
Last issue, we discussed the case for buying gold, especially for having physical holdings of the metal.
In this article, we will review the trends we see in the world of physical gold.
Global demand for gold is robust
In 2013, investment in physical gold bars and coins was the highest on record. Even now, we are well within the post-2008 range. In 2016, we saw gold demand gaining 2% to reach a three-year high of 4,308.7t., the highest demand for gold in the last three years. Annual inflows into an exchange-traded fund (ETF) reached 531.9t, the second highest on record. However, jewelry demand fell to a seven-year low, and central banks purchased less gold than before.
Surprisingly, although gold ETFs saw inflows of funds, the demand for physical bars and coins declined by 2% compared to 2015.
Purchases by central banks
Historically, gold’s role in the global economy has been as the ultimate safe-haven asset. Central banks use gold to shore up monetary stability. Fluctuations in a country’s gold reserves reflect how its central bank perceives the future of large-scale macroeconomic development. Up until the 2008 crisis, central banks were reducing their gold holdings. In the desperate search for economic stability that followed the crisis, governments worldwide showed a newfound interest in gold. Interestingly, it was primarily emerging economies that actually increased their gold reserves. Of special note were the largest buyers: China, Russia, Turkey, India and Kazakhstan.
This trend has accelerated these past three years.
The move to private storage service providers
In the last few years, we moved large quantities of precious metals as part of our precious metals services from banks’ vaults to privately managed vaults in different locations. There are a few reasons for this trend:
Fear of a financial crisis
As we mentioned last month, the financial crisis of 2008 created a great loss of confidence in “the system.” Investors are rightfully worried that storing their physical assets and bullion with a financial institution—the same banks that failed—will not give them the same peace of mind as storing their assets in private hands.
Accessibility to stored precious metals
Clients want to be able to access their wealth when THEY want to. Banks keep you subject to limited operating hours, while private storage operators offer greater exibility. You can visit and inspect your precious metals.
New government regulations affecting banks
Governments worldwide are tightening the screws. Banks have become regulated to the point where it’s difficult even to simply open an account. As a result of stricter regulations, it can be difficult to secure a bank-run storage unit.
Private vaults offer tailored solutions. That means clients can store paintings, large collections and any other valuables alongside their precious metals. They also benefit from the option to keep your stored wealth under more than one jurisdiction, but with the same company.
Uncertainty about how precious metals are stored
Clients have doubts about the storage of their bullion when it’s stored in a vault to which they have limited access. Is it truly allocated under the client’s name? Is it off the custodian balance sheet?