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Will gold price return to crazy high form?

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Will gold price ever return to its crazy high form? The recent meltdown of Asian Pay TV Trust (APTT) share price must have depressed many investors. Indeed, the Straits Times Index (STI), as a whole, had been performing poorly in 2018. Wealth builders who had ignored the wisdom of diversifying their portfolio in different assets are paying a heavy price now. Should stock investors run for their lives and shift their attention to gold instead?

Recent stock market corrections do not represent a full-blown crisis. But it does not reflect a signal for investors to enter the stock market either. Wealth builders should heed the warning and start insulating their portfolios against the risks unfolding in the market. You certainly don’t want to be caught with your pants down when there is a violent stock market correction.

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Then again, it is naïve to assume that the current unrest in the stock markets would lead to higher gold price in the coming months. This is because gold price is intricately linked to the monetary system, financial markets and central bank policies. In short, the drivers for gold price are not as simple as one would think.

Long seen as a safe haven, gold is often regarded as the asset to hold in times of uncertainties. In fact, gold price went on a rampage bull form in the period of The Great Financial Crisis, hitting a peak of USD1,900 per ounce in 2011. The euphoria in gold was driven by the chaos in the financial markets and this fuelled the charge in the gold price. Will history repeat itself?

History of gold price

Gold’s intriguing place in the global monetary system dated back to 1870s, when central banks used the classical Gold Standard to manage money supply. Under this system, the value of currency is linked to gold. This means that domestic currencies could be converted to gold at fixed prices and any international imbalance of payments were settled in gold.

In theory, the Gold Standard seemed straight-forward but in practice, the system is quite complicated due to the adjustment process of states. More importantly, such system often accelerated economic imbalance, giving rise to huge fluctuations to the market.

By 1944, the emergence of United States as a superpower nation had a profound influence on gold price as the world looked for an alternative system to replace the Gold Standard. Bretton Woods system was devised. Under this new system, gold price was fixed to USD35 per ounce, while other currencies had fixed but adjustable rates to the dollar.

gold price

However, the pegging of gold price to US dollar was not sustainable as US trade deficit grew in the 1960s. As a result, more and more countries were reluctant to accept US dollars in settlement. Then in 1971, President Nixon did the unthinkable – ending the convertibility of dollar into gold for the central banks. The collapse of the Bretton Woods system saw gold being freely traded in global markets.

Gold price explosion

After the end of the Bretton Woods system, gold was no longer held back by international monetary policies. Since then, gold never looked back. In the next ten years, gold price went through an explosive bull run, surging from USD35 to an incredible USD700 per ounce.

In my view, the surge in gold price was due to the sudden realization among investors that gold price was way too undervalued back then. As a commodity, gold has an intrinsic value. This is unlike fiat currency, which tends to lose purchasing power over time. Henceforth, gold is regarded as the best asset to store value. This is the reason why investors rush to buy gold during times of crises and great uncertainties.

Indeed, from 1981 to 2001, gold price had fallen from USD700 to a low of USD250, representing a crash of about 65%. This was because during this 20-year period, there was no major global events that would cause significant market downturns. Then the 911 terrorist attacks in 2001 sent a chilling reminder that the world financial remained prone to unexpected shocks. Gold price stormed to unprecedented heights and continued to climb to USD1900 per ounce in 2011.

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In gold we trust

Since 2011, the loose monetary policies and low interest rate environment saw gold price falling from the peak of USD1900 to as low as USD1068 per ounce in 2015. The slump in gold price was due to recovering US economy and a revival in US dollar.

Will gold price smash to another new high? Probably yes, because the world has not seen another alternative safe haven for financial assets. In 2016, the crash of China stock market, Brexit and the US Presidential Election saw gold price surging from USD1100 to USD1300 per ounce within a year. So it appears to me that gold price is absolutely capable of staging another magnificent run. It is only a matter of time.

In 2018, US stock market suffered a couple of bloodbaths in February and October, in which Dow Jones fell by more than 1000 points. There are telling signs that the bull run in the global stock markets could be coming to an extra-ordinary end after an incredible ten years. Logically, such jittery moods in the stock market should favour gold price but any potential increase in gold price would be offset by the interest rate hikes, which would strengthen the strength of US dollar.

The big boys

Although governments had decoupled gold from the monetary system, the precious metal still hold a great influence on central banks, which had been buying gold lately. According to World Gold Council, the third quarter of this year saw “central bank net purchases of 148.4t in Q3 were 22% higher y-o-y, the highest level of quarterly demand since Q4 of 2015”.

The data from World Gold Council is certainly encouraging and provides confidence in gold. At the same time, it was also revealed that more central banks are joining the bandwagon of adding gold to their reserves. Examples would be central bank of India, Mongolia, Poland, Hungary and Iraq.

When it comes to owning gold and silver bullion, one must have the right mentality. The purposes of buying bullion should be primarily for wealth preservation. Thus, one should hold allocate about 10% to 20% of his wealth in bullion. The prospects of gold bullion in the long-term is still fundamentally sound because gold remains a significant part of many central banks’ reserves.

In Singapore, the gold market ecosystem grew substantially with the removal of GST on investment grade precious metals in 2012. Being a country with low crime rate and strong jurisdiction system, Singapore is viewed by many international wealth builders to be the best place to buy and store gold bullion.

If you are an international investor, now may be the best time to start transferring your wealth out of the financial system by buying gold and silver bullion through BullionStar’s advanced online system.

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Updated: November 19, 2018 — 2:52 pm

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