How Gold Preserves Wealth

Latest research shows gold working as advertised for preserving capital in crisis...

 

JUAN CARLOS ARTIGAS leads Investment Research in the US for the World Gold Council.

 

His responsibilities include managing the global Investment Research team and providing oversight of WGC's research initiatives related to positioning gold as an integral part of investor portfolios. Here he speaks to Hard Asset Investor's Sumit Roy to discuss the WGC's latest Gold Demand Trends report...

 

HardAssetsInvestor: Gold demand has fallen for three straight years. Is that a trend that you see continuing?

 

Juan Carlos Artigas: The key takeaway for 2014 is that the market has come back to stabilization. The year before in 2013 was very unusual. You had strong outflows from ETFs and you had strong purchasing of physical gold in some countries. In 2014, there was a pullback in buying by those countries, but it was still considerably higher than what it was in 2012, 2011, 2010 or before.

 

I don't see demand staying down because you have had structural changes. One of them, emerging market demand from the likes of India and China, continues to grow, and we expect it to continue to grow as those economies develop further.

 

Second point: Central banks have turned from net sellers into net buyers. That's also something we see continuing.

 

Third: Investment demand. ETFs and other means of accessing gold, bring a new set of investors. Yes, there were some outflows last year and the year before, but there's still a lot of gold held in ETFs, and many of those investors have been holding for a really long time. That signals a strategic approach to gold.

 

HAI: What were the biggest gold-consuming countries in 2014?

 

Artigas: If you look at India versus mainland China, India was larger in 2014. That's a reversal from 2013 when China was larger by quite a bit. However, if you compare India to Greater China (Greater China includes China, Hong Kong and Taiwan) – then Greater China was about 20 metric tonnes higher than India even in 2014.

 

But regardless of whether India is number one or China is number one, the fact of the matter is that those two countries are not only very important for the gold market, they will remain very important. And there's a lot of growth in those markets.

 

HAI: Are you seeing an impact on European demand in response to the QE from the ECB and the troubles in Greece?

 

Artigas: There's been a lot of demand for bars and coins in Europe. There are data from the UK Mint that signals strong demand for coins and there's anecdotal evidence that Greeks have accessed the gold market to protect their wealth. Right now, people don't know what the outcome will be, but if Greece were to leave the Euro, I'm sure it would put many people in Greece in a tough position in terms of purchasing power. Those who can do so will try to preserve their wealth as much as possible, and gold is a very natural vehicle to do that.

 

HAI: One interesting thing that we saw in 2014 was the big divergence in the performance of gold based on the different currencies. In fact, gold rose in price in every currency except the Dollar. Does this have some sort of impact on the supply and demand?

 

Artigas: Your point is important. Gold prices in Dollar terms were pretty much flat in 2014. But in all other currencies, they went up.

 

That tells you a couple of things. What it says is gold continues to deliver what it's supposed to do, which is preserve capital. People are buying an asset long-term that they know will help them to withstand some of the pressures and some of the variability that you may get from currency depreciation or inflation. For example, investors in Russia who had gold were able to preserve wealth in a much better way than those who didn't.

 

It's also a reminder that the gold market is a global market. And even though the price of gold is often quoted in Dollars, the fact of the matter is what really is important for each investor and consumer is what their local price is, because that dictates consumer and investor behavior.

 

HAI: One bright spot for gold in the latest report that you put out was central bank buying. Russia, once again, led the pack in terms of buying. Will this continue?

 

Artigas: The best way to understand the central bank issue is on a broad basis. Obviously there are going to be a lot of idiosyncrasies from one country to the next, but what we can see is that in general, emerging market central banks have a propensity to be buying gold because it's a natural diversifier of their reserves. Many of these countries have or had historically a really large portion, if not all of their reserves, in US Dollars. Obviously, any foreign reserve manager realizes that putting all your eggs in the Dollar basket could bring some potential risks. Diversification is a very natural choice, and many of them have been diversifying using various currencies, including the Euro or the yen, and even other currencies.

 

Gold is a very natural choice emerging market central banks. They realize this and that's why for the past 10 years you have had many countries joining the club of those buying gold as a way of diversification. There are some that stand out more than others in terms of their purchases, but the general trend is that they're increasing their share of gold in their reserves.

 

Right now, the emerging market share of gold in foreign reserves is still small. It's about 3% or so, if you include all the emerging markets. Some of them have a little bit more, and some of them have less. In aggregate, it wouldn't be unthinkable that they can increase this number to five, seven or eight%. That supports our thesis that emerging market central banks will continue to be net buyers for the foreseeable future.

 

HAI: What do you think investors should keep an eye on for gold in 2015 looking forward?

 

Artigas: So far this year, there have been positive flows into ETFs. While ETFs form a relatively small portion of the market overall at 10%, they are very visible part of the market. It's one that you can track, and that's why it gets a lot of attention.

 

Because you can monitor it fairly consistently, you can see how some of the flows have developed so far. Why are investors coming back in? Investors are realizing that while the US economy is doing better, there are some issues with valuations in the equity market and uncertainty about how the recovery is going to pan out.

 

Also, there is the fact that worldwide not all economies are growing and there are still risks out there. Even many emerging markets that in the past used to be the darlings of growth and expansion are facing tougher conditions, whether it is Latin America or India or Africa, or elsewhere.

 

The actions that the Swiss National Bank took early this year were a wakeup call for many investors to look again into the value and the benefits that gold brings to a portfolio.

 

It's also important to understand that gold is an asset that benefits from economic growth. It's not an asset that only works well in periods of financial stress. Why? Well, because jewelry and technology are parts of demand that typically grow when economies grow. Thus, gold has many attractive traits that investors should consider closely.