This article was originally published on ETFTrends.com.
Investors who are looking for a way to diversify their portfolios may consider the potential risks and supporting factors that could maintain the gold outlook and consider an alternative approach to diversify a portfolio with a gold ETF.
On the recent webcast (available On Demand for CE Credit), Combating Geopolitical Risks in Your Portfolio, Cameron Alexander, Director, Metals Demand, Asia and the Middle East for Thomson Reuters, pointed to some of the overarching themes that could affect the gold market ahead, such as geopolitics and political risk, notably Brexit and tensions in the Middle East.
Basic consumer demand is an important buffer for price falls. As a result, Alexander argued that upside potential depends on continued uncertainty and risk hedging, predicting further price upside as a result. Looking ahead, rising prices could attract fresh retail investment in price-elastic regions, but upside momentum will be driven by external tensions. Alexander predicted that demand from ETFs could gain further ground in 2018 on rising geopolitical risk and uncertainty.
Alexander highlighted a recent Thomson Reuters GFMS survey that revealed physical demand recovering from a dismal 2016, with total physical demand before ETF activity gained 10% over the previous year - the recovery in jewelry demand and electronics drove the increase in industrial demand, but it was overall still well below earlier levels. Meanwhile, the annual reduction in supply last year reflected a drop of almost 100 tonnes in scrap return, which revealed gold’s relatively narrow range.
Outlook for Gold Demand
A rising middle class, notably among Chinese and Indian consumers that make up over 80% of global consumption, could further contribute to gold demand. Jerry Hicks, Sales and Business Development Manager for The Perth Mint, pointed out that by 2025, the World Gold Council expects China’s nominal GDP per capita to reach US$20,000, which surpasses the World Bank’s high-income threshold and exceeds the global average.
Additionally, the proportion of middle-class households across China’s 1.4 billion people is expected to hit 74% by 2020. Meanwhile, close behind China in terms of population is India, with 1.3 billion people, and it is expected to have a population of more than 1.7 billion by 2048. Both of these two emerging countries exhibit strong seasonal demand for gold.
"The cultural affinity for gold in these two Asian powerhouses is very evident from the lead-up to the Indian wedding season in September until Chinese New Year in February," Hicks said.
Global central banks have also been a large contributor to gold demand, and for the eighth consecutive year, central banks provided a substantial source of demand in the gold market in 2017, with net official sector activity rising by 36% to 366 tonnes, Alexander said. Additionally, Russia's central bank has been a large buyer this year, adding nearly 29 tons in July, the largest monthly increase since November.
Australia, the second biggest gold-producing country, has been a key player in global gold market. Hicks pointed out that of the 295 tonnes of gold produced last year, 92% was refined and distributed by The Perth Mint.
"We are therefore well aware of the robust demand for bullion among banks, investors and fabricators in key markets, including China and India. These countries are the world’s two largest consumers of gold and are, of course, situated within our region of the world," Hicks said.
As a way to better help investors access the gold market, Exchange Traded Concepts, in conjunction with The Perth Mint, Australia’s largest fully integrated precious metals refining, minting and depository enterprise, recently launched the Perth Mint Physical Gold ETF (AAAU) .
"Investors still want to include gold within their portfolios, but increasingly they are demanding an accessible and convenient way to hold the precious metal, without the need for physical storage," Hicks said.
Mike Cronan, President of Marketing Services at Exchange Traded Concepts, explained that AAAU is the first gold ETF backed by a sovereign entity, the Government of Western Australia. The fund’s Custodian Gold Corporation, which trades as The Perth Mint, is 100% owned by the Government of Western Australia and the guarantee is explicitly stated in an Act of Parliament, the Gold Corporation Act 1987. The majority of the fund's physical gold is vaulted by The Perth Mint, and its network of central bank grade vaults is the largest in the southern hemisphere and located in Western Australia, one of the world’s most geopolitically stable regions.
Additionally, AAAU shareholders can choose to exchange shares for physical gold from The Perth Mint at any time to almost any location serviced by FedEx. The fund is the only US-listed ETF to vault gold in Asia versus the traditional centers of NYC and London. The ETF comes with a very competitive management fee of 0.18% per annum, and it minimizes potential tracking error to the gold price that currency conversion could allow.
Financial advisors who are interested in learning more about investing in gold can watch the webcast here on demand.
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