eBusiness Weekly
Dr Keen Mhlanga
Gold’s role in the global economy has dwindled since the end of the gold standard, but it remains valuable as a central bank reserve, a risk hedge, a barometer of geopolitical uncertainty, and an input for jewellery.
While portfolio demand for gold has been extensively researched, the factors influencing physical demand are less well understood.
Most emerging-market countries, such as China and India, import significant amounts of gold, which could be attributed to a number of factors, including low financial development, the need for precautionary savings, and a strong cultural valuation of gold itself.
Asian countries purchased the most dollars’ worth of imported gold in 2021, totalling $191,6 billion, or 48,6 percent of the global total.
The determinants of physical demand differ from those of portfolio demand, and they differ between the developed and developing worlds.
Europeans accounted for 44,5 percent of total gold imports. Because leading gold importers Switzerland and the United Kingdom are not EU members, imports to the 27-member European Union are much lower (7,4 percent).
Another 5,2 percent of international gold purchases were delivered to North American importers. Oceania (1,3 percent), led by Australia, Africa (0,4 percent), and Latin America (0,1 percent), excluding Mexico but including the Caribbean, received lower percentages.
When a country’s inflation rate is high, investors typically purchase large quantities of gold. Because of its inherent value and limited supply, gold demand rises during inflationary times. Gold retains its value much better than other forms of currency because it cannot be diluted. Gold has a significant impact on the value of world currencies.
Despite the fact that the gold standard has been abandoned, gold as a commodity can be used as a substitute for fiat currencies and as an effective inflation hedge.
There is no doubt that gold will continue to play an important role in the foreign exchange markets. As a result, it is an important metal to track and analyse due to its unique ability to represent the health of both local and global economies.
Switzerland imported US$92,3 billion (23,4 percent of total gold imports) of gold in 2021, and as the largest importer, it maintained currency stability. A case that goes against economic fundamentals that states that countries, which are large importers of gold will inevitably end up with a weaker currency when the price of gold rises.
Swiss Franc (CHF) is more valuable than the USD thus denoting the predictive potential of demand for gold coins and bars as a proxy for the risk premium compatible with gold’s safe haven attribute.
Karat, usually written Carat, is the most commonly used measure of gold purity. It is a measure of fineness or purity. The finest type of gold is 24 Karat (KT) gold, which contains 24/24 parts gold.
Similarly, 22KT gold is made out of 22 parts gold and 2 parts other metals like zinc or silver to make it more durable when used to produce jewellery. The newly introduced Mosi-Oa-Tunya gold coin is 22KT. Gold is weighed in troy ounces (1 troy ounce = 31.1034768 grammes) and this is also equivalent to our local gold coin.
Gold is said to be a tangible asset with a long history of commanding a high market value. As a result, purchasing gold coins for investment allows one to be confident in future returns.
While other investment options may be risky, gold is relatively stable and will always protect money over time. Purchasing gold coins is a good way for those who cannot save money in currency.
The importance of gold in today’s economy stems from its ability to successfully preserve wealth over thousands of generations. Unlike other investment assets, gold coins can be easily passed down through generations once purchased.
That is exactly what has traditionally occurred within families. During significant events such as marriage, most people give gold coins and ornaments to their children or relatives.
This is an excellent way to give when you want them to save money in the long run and protect their future. The same cannot be said for paper currency, which adds to the benefits that make gold coins a good investment option. In comparison to other ornaments, it can be purchased in its purest form and at the lightest weight possible, with little to no manufacturing costs.
Furthermore, because of the high demand, the holder can always check the current market price and sell it without difficulty. If there is no need for selling, it can be pledged to obtain a loan from any reputable financial institution.
The best part about buying gold coins for investment is that, unlike other tangible assets, there is no need to worry about maintaining them to get the best returns. They can be easily kept for hundreds of years at home or choose to place it in the custody of bankers of choice, in which case a safe custody certificate/receipt will be issued, and sell them whenever want at the market price at the time.
Buying gold coins for investment has the added benefit of price stability. When compared to other investment options on the market, it’s price never falls by a significant margin and remains relatively stable even during a global financial crisis. Whenever there is a crisis, people flock to gold, causing the price to skyrocket in no time.
Exchange Traded Funds (ETFs) is another way to trade in gold without incurring the risk and expense of holding physical gold. ETFs are paper gold because they are backed by physical gold but traded like stocks. The downside is that gold ETFs are high-risk investments that are not suitable for beginners or the faint hearted.
Even though gold holds its value over time, especially when compared to paper currencies that are subject to inflation, investing in gold in the short term can be risky.
Gold prices, like stocks and other investments, rise and fall in response to global economic conditions and investor sentiment.
Considering what happened in February and March of 2020. As concerns about the growing coronavirus pandemic and its impact on the economy grew, investors sought refuge in gold, driving up the price.
Looking back, the price of gold reached its highest level in more than seven years at the start of March 2020, briefly trading above $1,700 per ounce. And logic dictated that as long as the stock market fell, more people would flock to gold, pushing the price even higher.
One of the reasons gold prices are so sensitive to fluctuations in demand is that the supply of gold is relatively fixed. Because gold is difficult and expensive to mine, there isn’t much of it in circulation.
The best estimate is that only 209,483 tonnes (190,040 metric tonnes) of gold have been mined in human history, and that number only grows by between 2,755 and 3,306 tonnes (2,500 and 3,000 metric tons) per year. When compared to steel, United States forged 1,8 million tonnes (1,6 million metric tonnes) of steel in just one week.
The gold spot price and the gold futures price are the two main prices. The spot price is the current gold price. Generally, you buy gold at a higher percentage than the spot price and sell it at the same price.
The spot price of gold is determined by supply and demand from investors, banks, and others, as well as market conditions and whether a currency is depreciating.
The futures price is a contract for the delivery of gold at a future date, and it is determined by the spot price, predicted supply and demand, and the cost of physically transporting the metal. Gold futures are regarded as extremely risky.
Several banks, an oversight committee, and a panel of internal and external chair members calculate the figures based on supply and demand in the gold futures derivative markets and establish averages for both the spot price and the fixed price.
Also incorporating financial evaluations of anonymous auctions that are run every 45 seconds.
These major derivative markets are operated by the Comex (CME) in the United States and the London Bullion Market Association (LBMA) in the United Kingdom.
A Fixed Price is used for larger orders. This is an average gold price that is used to offset minute-by-minute price fluctuations. Each price is determined by a series of electronic auctions that test and adjust an initial price that is close to the spot price.
It is set twice daily, at 11am and 3pm UK time, by organisations such as the LBMA or Comex.
Dr Keen Mhlanga is a global financial expect, key note speaker, investment advisor with high skills in digital banking, corporate and development finance. A dedicated, hardworking financial genius and business magnate. He is the executive chairman of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.
