Is there something brewing?

Schalk Louw is a portfolio manager at PSG Wealth.
Schalk Louw is a portfolio manager at PSG Wealth.

It doesn’t matter if you see gold as an investment or a bubble waiting to explode, the fact that it must be monitored, can no longer be denied.

Data is used everywhere these days. The upcoming US presidential election is a perfect example of this. Polls are updated literally on an hourly basis, to see if Trump or Biden will become the next US president. As with weather forecasts, which also rely on data, polls are not always correct (just ask Hillary Clinton), but it helps us to make more informed decisions.

I don’t want to discuss the upcoming US elections, as more than enough time and reports have been dedicated to it. I rather want to discuss a secondary subject related to these elections, namely gold, and a few interesting phenomena currently manifesting in the data surrounding the metal.

Is red the new gold?

Since the Bretton Woods monetary system came to an end in 1971, the need for central banks to purchase gold also basically came to an end. It is for this exact reason that the US still has the same number of tonnes in gold reserves today, as they had in 2006. And Britain took it one step further by selling nearly half of their gold reserves between 2000 and 2002, leaving them outside of the top ten countries with the largest gold reserves.

There have been many debates on whether a gold standard will make its appearance again at some point in the future.

But what really interests me, is the fact that Russia and China have both been massive gold buyers over the last decade (see table).

SOURCE: World Gold Council

Of the 5 172 tonnes in gold that have been purchased by central banks over the last ten years (up to 30 June 2020), Russia bought 1 544 tonnes, and China bought 893 tonnes.

That means that nearly half of all central bank gold purchases were made by these two countries. It makes you wonder why...

Passivity also helped

As an investment, gold still tickles the fancy of prominent investors, but not necessarily in the form of direct gold investments. Even Warren Buffett recently made headlines by announcing that Berkshire Hathaway purchased 20.9% of gold miner Barrick Gold’s shares (valued at roughly R12.5bn). But when it comes to gold investments, the purchase of gold bars remains the most popular.

Of the 13 280 tonnes in gold demand for investment purposes over the last decade (up to 30 June 2020), 66% was purchased in the form of gold bars. But the interesting part of this doesn’t lie in the 66%. It lies in the fact that only 11% of total demand was purchased by exchange-traded funds (ETFs). Why is this so interesting?

Well, although ETFs only made up 11% of gold demand over the last decade, 56% of total gold purchases for investment purposes were made by ETFs in the last 12 months ending 30 June.

Is this just the herd effect, or perhaps much wiser purchases?

A thing of beauty is a joy forever if you can afford it

It is true that gold has become a political play ball over the years, purchases over the last ten years (ending 30 June) havebut its main use is still for jewellery. More than 50% of all gold been made for the purposes of jewellery manufacturing.

Thus, of the 1 110 tonnes in average quarterly gold demand, about 555 tonnes per quarter was purchased to make jewellery. The question I have, is what effect Covid-19 had – and still may have – on jewellery stores and manufacturers over the next few months.

Unfortunately, not unlike the rest of the world economy, the effect has been incredibly negative. 

For the first quarter of 2020, gold demand for jewellery declined to 321 tonnes, and in the second quarter, it declined even further to 252 tonnes. This explains why a share like Richemont is still trading 25% lower in Swiss Franc terms today (by 19 October) than its share price of five years ago (October 2015). Can this create a possible investment opportunity for investors? I think so.

It doesn’t matter if you see gold as an investment or a bubble waiting to explode, the fact that it must be monitored, can no longer be denied. The data simply points to many things brewing under the surface.

Read more
This article originally appeared in the 5 November edition of finweek. You can buy and download the magazine here.

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