If you’re in the market to buy gold, you’re in very good company. If 2018 was the year of the dollar, then 2019 is proving to be the year of gold, as the data indicates that global demand will attain its highest point since 2015.
According to precious metals consultancy Metals Focus, the world will consume 4,370 tonnes (metric tons) of gold this year, the greatest annual amount in four years. Moreover, gold consumption for jewelry is expected to increase by 3 percent this year to 2,351 tonnes, including increases of 7 percent in India and 3 percent in China.
Metals Focus also projected an increase in the price of gold versus the U.S. dollar this year compared to last year, with contributing factors including the end of interest rate hikes by the U.S. Federal Reserve as well as global political and economic uncertainty.
Courtesy: Metals Focus, goldbroker.com
While jewelry purchases are undoubtedly a factor, investors should not ignore the global shift away from American debt instruments like Treasury notes and towards hard assets. Take Russia, for example: they’ve been dumping U.S. Treasurys and loading up on gold in massive quantities.
This isn’t a new phenomenon for Russia, as they’ve been divesting themselves of American debt and shoring up their gold reserves for years. However, Russia’s gold hoarding has seen a strong uptick in recent months – prompting questions of whether they’re simply seeking to sidestep U.S.-imposed economic sanctions, or whether they’re anticipating a global financial meltdown.
Data sourced from Russia’s central bank indicates that its gold reserves have nearly quadrupled over the past ten years, and that in terms of gold purchases, 2018 marked Russia’s most “ambitious year yet.” It’s gotten to the point that physical gold comprises 20% of Russia’s foreign exchange reserves – a considerable allocation by any measure.
This is significant for gold investors because, as BullionVault Ltd. Head of Research Adrian Ash explains, Russia’s large-scale gold purchases have “helped put a floor on the price.” And we are indeed seeing this floor in action, as gold versus the U.S. dollar has refused to make a significant and lasting break below the $1,300 level.
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And of course, Russia isn’t the only nation ramping up its gold reserves. As reported by U.S. Global Investors’ premier precious metals expert Frank Holmes, it wasn’t long ago that Hungary’s central bank increased its gold holdings tenfold, from 3.1 metric tons to 31.5 metric tons, with Hungarian central bank governor Gyorgy Matolcsy saying that the extra gold made the country’s reserves “safer” and “reduced risk.”
Also seeking to reduce risk through gold sizable purchases are China, Turkey, and Iran, among other world nations. As an investor, you might consider reducing your own portfolio’s risk through a reasonably sized allocation in precious metals. In terms of risk-adjusted returns over the long term, the data absolutely supports gold ownership:
Courtesy: New Frontier, World Gold Council, U.S. Global Investors
The research found that an institutional portfolio with a 6 percent gold allocation had a substantially higher Sharpe ratio (i.e., reduced volatility without hurting returns) compared to a portfolio without any gold exposure. That’s a powerful result – and a compelling reason to consider hard assets your best friend in these troubling times.
Whether gold dips slightly above or below $1,300 is ultimately just noise, and will challenge your sanity if you allow it to. You’ll be much better off ignoring the noise and aligning your investing strategy with the research – and to quote the World Gold Council’s Fred Yang, the “research indicates that most well-balanced portfolios would benefit from a modest allocation to gold.”
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