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Gold market opportunity cost is worth paying

by Gautam Sashittal in Dubai

Wed 7 Jun 2017

Two years ago some commentators predicted that the price of gold could fall below $1,000 an ounce and that the market was heading for a downward spiral. Today the precious metal costs around $1,250 an ounce, and its price has been on an upward trend since the start of the year.

Gold provides neither a dividend nor an income, so there is an opportunity cost in holding it. However, many investors may take the view that this is a cost worth paying when interest rates are low and the gold price is forecast to remain stable, or strengthen.

Demand in India appears to have recovered after last year’s crackdown on the informal economy by Prime Minister Narendra Modi. The World Gold Council says that the imminent goods and services tax will have a short-term impact on the Indian gold market but that this will be outweighed by the benefits of Modi’s policies.

In China, gold has long been popular as a store of value. Developing countries are reluctant to rely too heavily on reserve holdings in dollars, and appear to be using gold as a counter to the weight of the US currency. In June 2016, China disclosed that it had gold holdings of 1,823 tonnes, up from 1,658 tonnes a year earlier. This is still a long way short of the US, the world’s biggest official holder of gold with more than 8,100 tonnes.

For all the factors in gold’s favour, there are also risks: from rising interest rates; a longer bull market in equities than anticipated; and a stronger performance from the dollar if the US economy continues to improve.

Taking these issues into account, the London Bullion Market Association’s 2017 Forecast Survey estimates that the average gold price this year will be broadly in line with that of 2016.

Gold is unlike most commodities in that it is not just bought and sold for consumption, but is a store of value, a hedge, an investment. In a time of global uncertainty, gold is once again proving to be a beacon of stability.

Gautam Sashittal is Chief Executive of the Dubai Multi Commodities Centre. The contents of this article first appeared in the May edition of The Bulletin.

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