The World Gold Council says global growth will continue to support gold demand and has identified some factors that are expected to drive financial markets worldwide.
As part of the World Gold Council's report, the organization says income growth is leading to an increase in consumer demand for gold.
The increase in global growth will be driven by the U.S. and European economies. But the Chinese and Indian economies also will contribute because the two countries host the first and the second largest gold market in the world.
The Indian economy will show positive effects as a result of the implementation of the new Goods and Service Tax (GST). Also, demonetisation will also support these policies and initiatives, which, reports the World Gold Council, “are designed to improve transparency, broaden the tax base and draw the informal cash-based economy into the formal sector.”
The World Gold Council says that continued global economic expansion will likely result in a tighter monetary policy. A tighter money policy will increase the opportunity cost of investing in gold. However, the potential headwinds of a tighter monetary policy may not be as strong as expected because the high returns that have characterized government bonds for decades may decrease. Also, the volatility of the financial markets may rise and some idiosyncratic risk may reappear. In such a scenario, the yellow metal can offer investors a valid option versus financial market risks.
Despite the Fed’s intention to proceed in 2018 with three hikes in the interest rates, the World Gold Council believes the real-rate will stay low. In such an environment, gold has proved to perform very well.
The demand for gold will also be supported by wary investors who will increase their gold holdings and protect their wealth against an eventual financial distress. These investors believe that a correction in the global financial markets, which are characterized by bubbly asset prices at the moment, may occur in 2018.
Several initiatives taken by the London Bullion Market Association and India to enhance price transparency and to transact the metal more efficiently also will boost demand for the precious metal.
In Russia, a new gold investment market may be announced soon. If approved, a draft amendment to the Russian tax code may exempt purchases of gold bars from the value added tax (VAT). The 18% rate is one of the highest in the world.
The World Gold Council sees four peculiarities that make the yellow metal also suitable for a strategic investment over the long run:
Gold has been a return source for the portfolio of investors.
During expansionary and recessionary periods, gold has shown low correlation to major asset classes.Gold is a conventional asset that is not less liquid than other financial securities. And gold has contributed to improve the risk-adjusted returns of portfolios over time.
(Disclosure: I have no positions in any security mentioned in this article).
