Over the last few years, gold prices have been in the doldrums. With stock markets soaring to all-time highs, who wants to buy something that has no return? Well, things are about to change. Or should I say; are already changing in front of our eyes.
For the following two reasons, gold prices are about to soar.
Reason #1: China
The recent crash in China’s stock market has helped many investors realize the risk in stock investing. From June 12th to July 8th, the Shanghai Composite Index plunged a staggering 32.1%. In recent weeks, more than 1,000 stocks dropped by more than the 10% limit posed by regulators. At the peak of the crash, more than half of all publicly-listed companies in China filed for trading suspension to save themselves from further tumbles.
As a result, many investors pulled their money out of the stock market and securities investment funds. Where would all that money go? Gold.
In the first four trading days in July, settlement volume on the Shanghai Gold Exchange increased sixfold to 597 metric tons. (Source: Ifeng, July 9, 2015.) Moreover, before June, trading volume was already 20% higher compared to last year. By the end of June, daily trading volume at the Shanghai Gold Exchange surged to 48.3 metric tons. (Source: Sina, July 14, 2015.)
What we are seeing is that trading volume in stock exchanges has declined while trading volume in gold exchanges surged. This represents a shift of sentiment for Chinese investors—people are realizing that although gold did not offer astronomical returns like the Chinese stock market, it can and should be used as a great hedge.
And who says that gold can’t pay interest? A gold supermarket in Guangzhou, China, started offering gold interest on gold deposits: for every 50 grams of gold deposited, the store gives one gram of gold each year. That is a two percent interest rate on gold! (Source: People.cn, last accessed July 14, 2015.)
Mind you, China is a country with huge savings; its household savings total trillions of dollars. If a mere 10% of the savings were to enter the gold market, expect gold prices to shoot through the roof.
Reason #2: Central Banks Buying Gold
Central banks around the world bought 119.4 tons of gold in the first quarter of 2015. Although the amount was similar to last year, this was the seventeenth consecutive quarter where central banks were net buyers of gold.
Russia increased its gold reserves big-time over the past few years. In the first quarter of 2010, the country had 676.0 tons of gold, making up 5.4% of its total reserves. By the first quarter of 2015, Russia’s gold reserve surged to 1,238.3 tons. That is a more than 83% increase in less than five years! (Source: World Gold Council, last accessed July 14, 2015.)
Russia is not the only country that has been loading up gold reserves. From the first quarter of 2010 to the first quarter of 2015, Turkey increased its gold reserves by a whopping 341.9% from 116.1 tons to 513.0 tons. In the same period, Kazakhstan increased its gold reserves by 169.6%.
The idea is, when a country goes through a crisis, its central bank usually hoards gold. The reason is that gold gives the central bank credibility when its economy doesn’t. Today’s prevailing theme around the world is the slowing down in economic growth. Adding to that is uncertainty in the eurozone and conflicts in the Middle East. Needless to say, there is going to be a lot of gold buying before everything is resolved.
If central banks demand hasn’t boosted up gold prices yet, it will soon.