A New Perspective on Gold from Euclid Advisors
Market insights from the international investment professionals at Euclid Advisors:
Gold (and gold mining equities) have been struggling recently after a big start to the year; however, we feel the asset class is not to be overlooked within a portfolio context. We believe the geographical thrust in the demand for gold has shifted from the West to the East.
Through the 2008 financial crisis, the demand for gold from Western sources was strong, with much of that demand funneled through ETFs. As gold prices declined, the ETFs were sold, and, so they reduced their gold exposure. The basis for Western demand was primarily financial, with investors drawn to the yellow metal as a store of value without wanting to deal with the headache of taking physical delivery, storage costs, and so on.
Now, the physical demand for gold is strong, and we believe it is more Eastern-based, particularly from China and India. Indians like gold as a matter of taste, buying it for a multitude of reasons – as a store of value, for jewelry, as a hedge against inflation, and as a sign of prestige. The Chinese are more recent adherents. In fact, China has supplanted India as the largest buyer of gold.
There are a couple of reasons behind China’s growing gold interest. First, China’s central bank wants to diversify its $4 trillion in foreign exchange reserves. While they cannot do much of that in the gold market because the market is not big enough, they can add to their holdings on weakness. Second, it is commonly held that Chinese citizens are buying physical gold to get around the limitations in how they can invest. It appears that due to government-imposed capital controls, the Chinese are using many commodities, including gold, to get value out of the country by having overseas vendors inflate invoices so the Chinese have a “reason” to send more value abroad. China’s property market is clearly not attractive. Its stock market has not been helping. The economy is slowing. Pollution is a cause for worry. Where else can the Chinese invest?
In our view, these factors point to continued strong physical demand for gold which, in turn, should help stabilize its price. In addition, gold mining stocks are still trading at very depressed levels from just a few years ago; in some cases below their NAV, with cash production costs below the current spot price. From our perspective, the potential opportunity in gold warrants further attention from investors.