Historically speaking, the price of gold increases amidst geopolitical tensions. With the UK’s new prime minister, the looming of a Halloween departure from the European Union and US currency wars, there is no shortage of international pressures.
In June, China added gold to its foreign reserves. The news comes from South China Morning Post, confirming that it is the seventh consecutive month the country has done so. Considering international pressures, ambiguities over Trump’s administration’s commitment, the threat of currency wars and interest rates occurring negative levels, China’s decision to invest in gold could prove advantageous.
So, as trade wars continue and a weaker US dollar threatens, investors could seek to sell the dollar and buy up gold. However, China is not the imperial buyer of gold. In 2018, the central banks bought 651 tonnes – an increase of 74% in comparison to 2017. Isabelle Strauss-Kahn, who sits on the board for the World Gold Council comments that the purchase of gold is at its highest level since 1971. It is a trend that has matured in 2019, with 90 tonnes of net purchases by the end of the first quarter.
However, despite the growth, it is no guarantee that the prices of gold will rise. Equally, investing in gold has additional merits. At the same time, the diversification of the central bank’s reserves remains relatively small in comparison to flat currencies.
If we review China, the sum reserves in June were US$3.119 trillion and just US$87.27 billion was in gold. Thus, looking towards other stocks and investments could prove to be lucrative.
Although gold could be an opportunity, investors should also consider the fact that the expensive metal holds no interest rates. Thus, the addition of gold to a portfolio means factoring in both the cost of holding a position and the cost of opportune returns that could be derived from elsewhere.
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