Resurging Commodity Markets? Part 3 – Gold
It is a well known fact that investors look to gold for low-risk liquidity during times of uncertainty. A case in point is the 2008 financial crisis which sparked a monstrous three-year climb in the value of gold; these drastic events, otherwise known as “Black Swan” events, are unforeseen circumstances that result in dramatic market shifts, and odds are looking good that 2017 could feature the beginning of one such shift.
Since 2012, gold has fluctuated between just over $1,000/oz and $1,338/oz, consistently bouncing off the stress point seen at around $1,250, and while the value of the dollar has increased since the election of President Trump, continued uncertainty is keeping buyers’ attention on the yellow metal. This uncertainty, coupled with recent developments in the Islamic investment community, could see gold take another significant upturn this year, regardless of whether or not the dollar continues to climb.
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The latest US administration may have strengthened US currency so far, but doubts are rife that this can continue throughout the year. Many investors globally expect Trump’s trade negotiations to become hostile, triggering further apprehension in regard to stock markets and high-risk investments. The situation remains similar in Europe, where the market shudders each time the risk of a “hard Brexit” surfaces due to the serious consequences this would have for London, Europe’s current financial center.
Perhaps the most significant development is the Shari’ah gold standard introduced at the end of 2016. Prior to this point, there were virtually no gold securities that were compliant with Shari’ah law, and so the world’s 1.6 billion Muslims were kept out of a sizeable portion of the market; however, the official guidance finalised in November allows the community, which currently features around 110 million Islamic investors, to use gold bullion products and platforms that offer physical delivery, allocated and segregated gold ownership.
In Islam, gold is one of the six ribawi items alongside silver, wheat, dates, barley and salt. Ribawi items are defined as staple, everyday commodities to which stringent transaction rules apply to prevent unjust or inequitable transactions. Islamic savers and investors currently hold almost $2 trillion in assets, an amount that is expected to grow to $6.5 trillion by 2020, according to the Islamic Finance Stability Board.
Given that the global Muslim community faces possibly the greatest level of political precariousness under the current US Administration, it seems likely that investors will run to the safety metal throughout the year, and some analysts are suggesting that this could represent a new “Black Swan” event that stands to drive the price of gold upward, potentially right through to 2020 and beyond. Even if Islamic financial organisations allocated just 1% of equity to gold, this would equate to almost $65 billion in new demand, almost double China’s estimated demand for the entire of 2015.
In the last century, gold has, to a great extent, outperformed all major currencies as a means of exchange due to the fact that the supply of gold changes relatively little each year. Mine production increases stocks by around 2% annually, whereas fiat currencies face no such physical limits and can be printed at the whim of current monetary policy. In fact, all major currencies have depreciated over the past century relative to gold, and the next few years of continuing political unrest in the middle-east is very likely, in my opinion, to cause a new wave of gold enthusiasts to rush into the market and push the metal to historic highs.
Lara Smith has spent over a decade covering commodity markets. She started her career as a buyside analyst in South Africa where she covered soft ... <Read more about Lara Smith>