Notable report of the World Gold Council
Last month, the World Gold Council published two interesting reports on gold. The first report is the latest edition of the gold demand trend, summarizing the whole year. Gold supply fell 1%, while demand for gold increased by 10% in 2021. Despite these trends, gold prices fell by about 4%.
According to investment consultant Arkadiusz Sieroń, economist and board member of the Polish Mises Research Institute, the above figure weakens the validity of the data provided by the World Gold Council.
"I would like to say that the appropriateness of some gold demand categories (gewelry demand, technology demand, central bank gold purchases) for price formation is somewhat limited. The most important driver for gold prices is investment demand. It is no surprise that the portfolio fell 43% in 2021, driven by large ETFs, FXStreet quoted Sieroń as saying.
According to the report, the direction of gold is largely based on inflation and interest rate forecasts in 2021, although it appears that the increase rate has exceeded inflation concerns. Interest rates have increased significantly last year. For example, the yield on the 10-year US Treasury note rose by 60 basis points. Therefore, the opportunity cost of holding gold increased, causing gold reserve flow from ETFs.
As interest rate hikes are likely to continue into 2022 due to the Fed's tough stance, gold investment could also face difficulties this year. The end of quantitative easing and the start of tightening the luong can put more downward pressure on gold prices.
However, there are some optimistic warnings here. First, gold continued to recover in January, despite a meeting of the Federal Open Market Committee (FOMC). Second, the Fed's tightening cycle could be disadvantageous for the US stock market and the overall public debt economy, which could support gold prices. Third, as the report points out, "gold has grown better than it has in history in the months after the Fed's tightening cycle began."
The second report released by the World Gold Council last month is The Suitability of Gold as a Strategic Asset 2022. The report's main focus is gold as a strategic asset, supplementing stocks and bonds, helping to improve the operational efficiency of the portfolio. This is because gold is a "reserve of wealth and a hedge against systemic risks, currency depreciation and inflation". It also has high liquidity, no credit risks and is scarce, historically maintaining its value over time.
According to the World Gold Council, gold is considered a source of great profit, as gold prices have increased by an average of nearly 11% per year since 2015. Gold can also provide liquidity, as the gold market has high liquidity. As the report pointed out, the amount of physical gold held by investors and central banks is worth about 4.9 trillion USD, plus 1.2 trillion USD in open-end interest via derivatives traded on exchanges or free-to- market (OTC).
Finally, but equally importantly, gold is a great portfolio diversification tool, as it has a counterproductive correlation with risk assets and - importantly - this counterproductive correlation increases when these assets are sold off.
Therefore, adding gold to the portfolio can diversify the portfolio, improve risk-adjusted yields and also provide liquidity to meet repayment debts in times of market stress.
The World Gold Council's analysis suggests that investors should consider adding 4% to 15% of gold to their portfolios, but Arkadiusz Sieroń would limit the figure to 10%.
Interesting in gold
What do recent reports from the World Gold Council imply for the gold market? One thing is, adding gold to your portfolio would probably be a smart move. After all, gold plays a role as both a safe haven asset and a insurance against potential risks. It's great to be guaranteed. However, investing in gold is something different, as gold may be in an uptrend or downtrend.
Expert Arkadiusz Sieroń advises against confusing the two motives behind owning gold! Sometimes owning gold for both insurance and investment reasons is a good thing, but not always. By 2022, investment demand for gold may continue to decline under pressure from rising interest rates. However, there are also some trends in prices that are likely to strengthen by the end of this year.
