Al Ittihad claims top spot in Saudi Pro League after victory over Al Fateh    Saudi delegation participates in the 7th U20 Deans Summit in Brazil    Al-Jubeir discusses with EU officials enhancing bilateral cooperation    GASTAT: Non-oil exports up 22.8% in September 2024    Saudi Arabia to host 28th Annual World Investment Conference in Riyadh    Saudi Arabia allows licensed flour milling companies to export flour    Saudi Arabia joins international partnership initiative to boost hydrogen economy    Israeli drones kill two paramedics, injure four in southern Lebanon    Trump's new attorney general nominee sparks concerns over DOJ independence    Australia drops proposed laws to regulate social media misinformation    Six Palestinians killed in Israeli airstrikes on central Gaza    Riyadh Emir inaugurates International Conference on Conjoined Twins in Riyadh    Al Khaleej stuns Al Hilal with 3-2 victory, ending 57-match unbeaten run    SFDA move to impose travel ban on workers of food outlets in the event of food poisoning    Al Okhdood halts Al Shabab's winning streak with a 1-1 draw in Saudi Pro League    Saudi musical marvels takes center stage in Tokyo's iconic opera hall    Al Khaleej qualifies for Asian Men's Club League Handball Championship final    Katy Perry v Katie Perry: Singer wins right to use name in Australia    Sitting too much linked to heart disease –– even if you work out    Denmark's Victoria Kjær Theilvig wins Miss Universe 2024    Order vs. Morality: Lessons from New York's 1977 Blackout    India puts blockbuster Pakistani film on hold    The Vikings and the Islamic world    Filipino pilgrim's incredible evolution from an enemy of Islam to its staunch advocate    Exotic Taif Roses Simulation Performed at Taif Rose Festival    Asian shares mixed Tuesday    Weather Forecast for Tuesday    Saudi Tourism Authority Participates in Arabian Travel Market Exhibition in Dubai    Minister of Industry Announces 50 Investment Opportunities Worth over SAR 96 Billion in Machinery, Equipment Sector    HRH Crown Prince Offers Condolences to Crown Prince of Kuwait on Death of Sheikh Fawaz Salman Abdullah Al-Ali Al-Malek Al-Sabah    HRH Crown Prince Congratulates Santiago Peña on Winning Presidential Election in Paraguay    SDAIA Launches 1st Phase of 'Elevate Program' to Train 1,000 Women on Data, AI    41 Saudi Citizens and 171 Others from Brotherly and Friendly Countries Arrive in Saudi Arabia from Sudan    Saudi Arabia Hosts 1st Meeting of Arab Authorities Controlling Medicines    General Directorate of Narcotics Control Foils Attempt to Smuggle over 5 Million Amphetamine Pills    NAVI Javelins Crowned as Champions of Women's Counter-Strike: Global Offensive (CS:GO) Competitions    Saudi Karate Team Wins Four Medals in World Youth League Championship    Third Edition of FIFA Forward Program Kicks off in Riyadh    Evacuated from Sudan, 187 Nationals from Several Countries Arrive in Jeddah    SPA Documents Thajjud Prayer at Prophet's Mosque in Madinah    SFDA Recommends to Test Blood Sugar at Home Two or Three Hours after Meals    SFDA Offers Various Recommendations for Safe Food Frying    SFDA Provides Five Tips for Using Home Blood Pressure Monitor    SFDA: Instant Soup Contains Large Amounts of Salt    Mawani: New shipping service to connect Jubail Commercial Port to 11 global ports    Custodian of the Two Holy Mosques Delivers Speech to Pilgrims, Citizens, Residents and Muslims around the World    Sheikh Al-Issa in Arafah's Sermon: Allaah Blessed You by Making It Easy for You to Carry out This Obligation. Thus, Ensure Following the Guidance of Your Prophet    Custodian of the Two Holy Mosques addresses citizens and all Muslims on the occasion of the Holy month of Ramadan    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



Investors fixated on factors that drive gold prices
Published in The Saudi Gazette on 19 - 09 - 2016

GOLD is one of the best-performing asset classes this year, up nearly 24 percent. However we are still 30 percent lower than the highs reached in September 2011. So a lower base effect has been one of the main drivers in 2016. But investors have been asking lately what are the key drivers of gold and should they keep or get exposure?
Let us recollect the evolution of gold prices over the last 40 years. In the 1970s a strong rally in the gold price sparked exploration activity resulting in the discovery of new mines and eventually more supply. By the mid-1990s, a strengthening US dollar depressed gold prices. In the gold price glory days between 2000 and 2011 when gold prices appreciated over 500%, the focus of investors was to gain maximum exposure to the rising gold price. Also the gold price embarked on its massive bull run fueled by increased EM demand, the introduction of physically backed gold ETFs and, later, the global financial crisis from 2009. This changed abruptly in 2013, when gold prices collapsed by almost 30% in a space of six months. This created large scale selling among investors. So gold has had large pricing swings which sometimes lasting for decades.
So what drives gold prices today? First of all gold moves inversely with the real bond yield (so as real bond yields, which takes into account the rate of Inflation, goes up the price of gold goes down) this is because gold does not provide owners with an income. Secondly, gold moves inversely with banks and is a play on the financial/monetary system failing. As banks are seen as the gatekeepers of economic capital flow, any distress among the industry benefits gold as a safe haven investment. Thirdly, the performance of the USD also impacts gold pricing (again inversely related) as being the major pricing currency of the precious metal. One key feature since September 2011 has been the stronger US dollar. Gold has been clearly negatively impacted. Also as we expect bond yields to start to rise based on the US federal reserve's most probable interest rates increase at the end of this year and add to the fact, there is currently no obvious financial stress in the banking industry and a rising USD, it does seem that Gold may start to face near terms risks to performance.
While this may be the case we are still with the belief that gold can have an important role to play in an investor's portfolio for example, gold benefits USD based investors for multiple reasons. It effectively helps manage risk in a portfolio, as it increases risk adjusted returns and reduces the expected losses incurred during extreme market events. In the long term, gold's diversification credentials increases portfolio efficiency, both in good and bad economic times. Likewise a reduction of potential losses over the long term requires fewer often expensive contingency measures to deal with the potential for extreme losses.
Over the longer term, gold prices could move higher, as USD strength could start to fade as global markets start to price in the new rate cycle. However, one of the biggest positives for gold is more demand from central banks. There are $11 trillion of global foreign exchange reserves (11% in gold), but a number of central banks hold only a very small amount of gold. If those with less than 20% in gold raised these holdings to 20% of reserves, then gold demand would rise six-folds.
The bottom line is that the 3 key drivers of gold price are: i) real rates ii) the US dollar; and iii) fear of financial/monetary instability. Irrespective, if investors have a strong view or not on these drivers, gold will always have a place among global portfolios for the foreseeable future.
* The writer is Managing Director Head of Advisory at SEDCO Capital


Clic here to read the story from its source.