Has gold’s value been mispriced as an investment asset?
When it comes to investing and gold markets, it may seem like everyone has something then believe to be important to say. There are many schools of thought, opinions and analyst that can be confusing. There are people who believe gold is undervalued as an investment asset because it is compartmentalised into gold for investment, gold for industrial use and gold for the jewellery sector.
The jewellery industry is arguably the biggest consumer of gold, and as such, some analysts believe that we should be looking at this sector and its reaction to changing gold prices in order to understand other sectors like the gold bullion market. About 50% gold that is mined and refined goes to the jewellery industry making this industry a primary source of utility. However gold bullion buyers choose this metal because it creates a safety net and protects individuals wealth in inflationary times. In 2021, at the height of the latest pandemic, the jewellery sector consumed twice as much as gold bullion. This is why people who want to buy gold bullion at the best price look at jewellery market trends like at the demand for gold during the Indian Wedding season, religious and cultural events that feature gold, etc.
The price of gold can never go down to zero. This might happen with paper currencies and we have in fact witnessed some currencies falling to a point where they are not worth the paper they are printed on. Think Zimbabwe or Venezuela. The correlation between gold and interest rates is not as clear as it should be. When interest rates fall, the price of gold should rise. When they rise the gold price jumps accordingly. If the inflation rate remains at inflated financial system will not return to normal for an extended period, creating an environment where gold will shine.
January was rough month for gold in terms of surrounding factors, however gold’s price shrugged them off. Alongside a strong dollar, gold was held back by what many have called “extreme pricing” of rate hikes. There was a general anticipation that the FED interest rates would near zero, however, for the first time in nearly 2 years, U.S Treasury yield broke the 2% level. Because of speculation and anticipation that certain things will happen, there was still some uncertainty of where the economy and the stock market would end up. Despite all this uncertainty and maybe because of it he price of gold rose to $1,853 on the 25th January 2022.
Fund managers looked to ETF or paper gold. They seemed to be doing better than expected. On the 21st January 2022, the largest gold fund recorded incredible inflows that amounted to $1.63 billion, this was the biggest inflow in the history of exchange traded gold funds. Institutional investors use paper gold funds as a hedge against inflation and to protect themselves against stock market declines. A historic movement like that one can be read as an indication of pessimism on the short term future of the gold prices.
The World Gold Council also recorded some gains in demands from the key gold sectors.
- The Demand for gold jewellery grew by 67% globally
- The demand Investment grade gold bullion bars and coins grew to an eight year high of 31%
- Industrial manufacturing order 9% more gold than they did in previous years
- Central banks also increased their gold holdings to 82%.
Based on this rise in demand for gold can be read as an indication that the world is bracing itself for some serious inflation and economic hardships in the near future. If you are wondering what this means for you as an individual looking to keep a health investment portfolio then the answer to the question of whether you should buy gold bullion now is a resounding YES!