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8 Dec 2020

Econ Digest

5 Questions for new gold investors

Gold has been one of the most profitable assets of 2020. On December 4, 2020, the spot gold price in the global market rose 21% from the end of last year to USD1,840 per ounce, while the domestic gold price rose 22% to THB26,250 per Baht(Thai unit of measurement). For new investors interested in investing in gold, here are five things you should know before deciding to invest:

 

Q: How does US dollar direction affect gold price?

A: The US dollar often moves in the opposite direction of the price of gold, because gold contracts are normally traded (prices are quoted) in US dollars, so a weaker US dollar will attract investors holding other currencies to invest more in gold contracts.

 

Q: Why gold is seen as a safe-haven asset?

A: Gold has many of the attributes of a safe-haven asset, especially two advantages, namely that gold is a value-accumulating commodity and that the gold price tends to move in the opposite direction to risky assets under normal market conditions. Therefore, investors often diversify their investment portfolios by allocating a weight to gold.

 

Q: Gold is safe, but why does the price of gold fluctuate?

A: In addition to its use in the gems and jewelry industry and the electronics industry, gold is also one of the preferred assets for investors in diversification of their investment and is a reserve of many central banks. Therefore, the gold price moves up or down depending on the market mechanism, the strength of the market participants’ buying and selling, festival-related factors (e.g. Chinese Lunar New Year and India’s Diwali Festival), as well as other important factors such as the direction of the US dollar and concerns about the situation of the COVID-19 outbreak. If you use statistical methods to calculate the volatility of gold, you will find that the volatility of gold this year has increased to 19.5%, higher than its volatility of 11.4% in 2019.

 

Q: Who are the big participants in the global gold market?

A: According to data from the World Gold Council (WGC), excluding the global ETF’s gold holdings of approximately 3,900 tons, the major gold holders that play a key role in the gold market are central banks of different countries, which gradually buy gold as reserves; the US Federal Reserve holds 8,100 tons, Germany holds 3,400 tons, Italy holds 2,500 tons, France holds 2,400 tons, Russia holds 2,300 tons, China holds 1,900 tons, and Thailand holds 154 tons. Therefore, the strength of the buying and selling of gold by these participants, such as net selling by some central banks, will have an inevitable effect on the price of gold, which is one of the factors leading to the decline of the price of gold from its record highs in 3Q2020.

 

Q: What are the key factors that will affect future gold price movements that need to be monitored closely?

A: There are several key factors that will influence the direction of the price of gold over the next 3-6 months. The main negative factor will be signs of the successful development of the COVID-19 vaccine, while the main positive factor will be pressure on the US dollar from the Fed’s easing of monetary policy. New investors should monitor these factors closely.

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Econ Digest