Gold: More than just a quick intoxication?

The gold price recently marked a six-year high. In particular, central banks have contributed to this, either directly as gold buyers or indirectly through their monetary policy. The exciting question remains: is the euphoria lasting?

Gold has made an impressive comeback in the past few months. In June alone, the price of the yellow precious metal rose by just under ten percent. For the first time since summer 2013, the troy ounce was above the 1,400 US dollar mark. Where does the sudden interest come from after the price of gold sluggish for years?

China is increasing its gold reserves

Gold is commonly considered a safe haven in turbulent times. This feature was the precious metal last again. Above all, the trade war between the US and China weighs like a sword of Damocles over the world economy.

China’s economic growth slowed to 6.2 percent in the second quarter, the lowest rate in 27 years, according to recent data. In response to mounting economic risks, the Chinese central bank PBoC has been transitioning steadily from its start to the year to increase its gold reserves. According to the Gold Mine Association World Gold Council, the PBoC increased its gold holdings by nearly 74 tonnes between December 2018 and May 2019 to a total of 1,916 tonnes. In June, another ten tonnes were added.

Impulses through monetary policy

Other central banks, especially in emerging markets, followed Beijing’s example. The Indian central bank raised its gold reserves this year by almost 18 tons, and the Russian central bank even by about 77 tons (period: from the end of December 2018 to the end of May 2019). The Fed and the ECB have contributed to the flight of gold. However, not by buying, but their monetary policy changes. In the US, a rate cut at the end of July is now considered a foregone conclusion. In the eurozone, on the other hand, an end to the zero-percent policy was postponed indefinitely. The monetary policy pans of the two main central banks in the world have put bond yields heavily under pressure, which in turn has benefited gold as an investment class. Accordingly, in June alone, the holdings of physically deposited gold ETFs increased by 127 tonnes, or $ 5.5 billion, to a total of 2,548 tonnes. That’s the highest value in about six years.

Investors in the gold rush

Gold is in demand again with investors. This is also suggested by the results of the latest Citi Investment Barometer. In the most recent survey in the first half of June, nearly 60 percent of investors surveyed expect the price of gold to rise in the short term – three months from now. The mood for gold has not been that good for a long time. The question remains: how long will the euphoria last? That the upward trend is not yet over, this is supported by the ongoing purchases of central banks. The World Gold Council’s current semi-annual report assumes that central banks will continue to increase their holdings. Another argument for gold: Not only fixed income securities have become less attractive due to falling yields versus gold. Even stocks are now to be treated with caution. Should the trade conflict (further) put a brake on corporate earnings growth and thus put pressure on prices, investors could put even more emphasis on gold as a safe haven in the future.