Angelos Damaskos, CEO, Sector Investment Managers and Fund Advisor has said that the current economic optimism may be short-lived and that the fiscal problems of the developed economies will re-surface as a threat to growth, which in turn should lead to a positive effect on gold.
“Gold should benefit again from such a scenario and its price may rise to new highs,” says Damaskos. “The shares of high quality gold mining companies are likely to respond very quickly making it difficult to establish new positions. We, therefore, remain almost fully invested in companies with large reserves, growing production, solid balance sheets and top-rated management teams.”
Global gold consumption in Q3 2010 grew by 12% over the previous year. Demand for gold jewellery increased by 8% with four main markets India, China, Russia and Turkey accounting for 63% of global demand. Retail investment rose by 25% from Q3 2009 with the largest contributor being gold bars, which increased by 44%, according to the World Gold Council.
“In January and early February 2011 there was some consolidation in the gold price and, consequently, in the share prices of gold mining companies,” adds Damaskos. “Encouraging economic activity reports out-weighed the social and political unrest in Egypt and Tunisia and the uneventful bond auctions in Portuguese and Spanish bonds also contributed to optimism in the equity markets.”
The World Gold Council and the Industrial and Commercial Bank of China recently announced a strategic partnership to help Chinese investors accumulate gold on a daily, dollar-averaging basis. The minimum investment is one gram of gold a day. The programme was launched in April 2010 and, during the first phase in a few selected cities; over one million accounts have already been opened with this one bank, collectively acquiring over 10 tonnes of gold.
“Retail investment plays a large and growing part in investment demand. Given the growing affluence among the Chinese and their traditional belief in gold as a store of value, this trend is set to continue” adds Damaskos. “What is impressive in Chinas growing demand for gold is the speed and scale of change. A recent survey indicated that China imported over 209 metric tons of gold in the first ten months of 2010, five times of what it imported in all of 2009. The World Gold Council predicts that Chinese demand in 2010 reached 600 tonnes, just behind Indias 800 tonnes of gold, meaning China and India collectively bought about half of total world mine production in 2010.”
This is the latest in a long line of firms looking to gain a stronghold in the gold markets, as clients look to hedge against inflation and post as collateral.
J.P. Morgan announced earlier this month that it will now accept physical gold to satisfy securities lending and repo obligations with counterparties the only tri-party collateral manager to do so.
The ability to finance and leverage the broadest range of asset classes is important to our clients, said John Rivett, collateral management executive for J.P. Morgan Worldwide Securities Services in the first week of February. Many clients are holding gold on their balance sheets as an inflation hedge and are looking to make these assets work for them as collateral. By combining our collateral management and vaulting capabilities, we provide clients with greater flexibility in how they mobilize collateral.
The automated use of gold in collateral management is introduced under J.P. Morgans Worldwide Securities Services global collateral engine initiative. This initiative enables clients to mobilize collateral inventories across multiple geographies and trading activities, regardless of the underlying obligation, to extract maximum value and manage risk, J.P. Morgan says.
The firm expects to accept additional precious metals and commodities as collateral later in the year.