Humans have fascination for gold, it is part of who we are. It is part of civilization. It is a tangible liquid asset that is always short in supply and strong demand. Thus, in times of crisis like this pandemic, governments and companies run for safe assets by buying more gold. Since March this year, the price of gold has appreciated by almost 30 percent.
In a webinar on "The World of Physical Gold in the Age of Covid-19” organized by the German Chamber of Commerce of the Philippines, international expert Joshua Rotbart, founder and managing partner of J. Rotbart & Co., a Hong Kong-based bullion house providing solutions for high net worth individuals and families, asset management firms and private banks wishing to procure, store and transport physical precious metals and other tangible assets worldwide, highlighted the circumstances over the soaring prices of gold.
According to Rotbart, gold has appreciated by over 20 percent since reaching an all-time high in August this year.
“We have not seen this long rally since the ‘70s,” he said. In fact, he cited analysts projecting gold to hit $2,300 up to high of $3,500 an ounce in the next two to three years. Gold spot prices per ounce hovers at $1,947 an ounce.
ALTERNATIVE INVESTMENT
While gold is only seen in terms of jewelry and as gifts during the good times, Rotbart said, gold has always traditionally perform better during financial crisis and more countries are hoarding gold as investments.
During the financial crisis, gold is seen as alternative to US dollars, government bonds and real estate
investments.
“When things go bad people run for safety,” he said.
As governments are easing fiscal policies like economic stimulus packages and zero interest rate on loans to encourage people to invest to put the economy back on track, but Rotbart said “That is an old trick,” noting the loosening of fiscal policy means printing of more money.
While there is nothing wrong with a promissory note, he stressed that when you print more of it, its worth is reduced. As a result, it could cause high inflation.
There is also no point also of saving gold paper because interest rates are almost down to zero.
The US government is printing lots of money while Germany, France and others are bailing out distressed companies. The US Federal Reserves has increased their balance sheet to $2 trillion.
“There is no way to cover this huge debt except to print more money. Who will pay all these debts,” he asked.
LIQUID
In contrast, gold does not earn interest, but its prices have been appreciating by an average of 10 percent for the past years.
“But when you hold government bonds and you get nothing, there is no point of holding on to bonds. So, gold is more important because you are not losing liquidity,” he added.
Staying liquid is something that people want to establish during a crisis. Investors do not want to go into an asset that is illiquid.
According to Rotbart, businessmen want to have liquid assets so that when an opportunity comes up, they can easily invest.
Investing in stock market is not also a good idea as stocks globally, including the Philippine stock exchange, are also doing very very bad with some firms losing as much as 25 percent of their value.
“But those that buy gold showed the gold has a balancing effect in their portfolio,” he said.
Statistically, he said, it has been proven that gold holding of up to 10 to 15 percent of portfolio is a good balance because gold has a diversifying effect.
FEAR FACTOR
Another factor that is driving the price of gold at all-time high is fear.
“Clients are concerned, they don’t know what will happen tomorrow, maybe we go third or fourth wave,” he said noting some countries that reopened have seen new outbreaks and are implementing new restrictions again.
With this foreboding, investors run to gold. “Gold is an emotional commodity we cling to for it has been proven a safe investment,” said Rotbart.
This recession, he said, could be relatively long and sparing no one, including dry cleaners as unemployment soars to record levels.
The low interest rate regime and negative yield bonds will continue.
There are also concerns of US and China heading to a new cold war. Countries need to align themselves, are you with us or without us?
US and Germany, the world’s leading in holdings of gold, while the big buyers are China, Russia, Turkey, and Kazakhstan as they dumped the US dollar.
Venezuela, which is under sanction, is paying Russia physical gold for goods and military supply. Russia together with Turkey and Iran do not want US dollar are buying and trading physical gold.
Poland and Hungary are buying gold to develop their economies and as part of their fiscal policy.
Interestingly, Germany which used to save their gold in New York withdrew their hoard. Poland also repatriated their gold from London to Warsaw. “Countries are bringing their gold back home,” he observed.
PAPER GOLD
Interestingly, Rotbart said one reason why physical gold and not paper gold is considered the investment haven is because, “First because the queen believes in it and second, we have concerns about paper market.”
One main concern is the fact that paper gold is not backed with physical asset so even with the best ATFs, he said, they trade 80 percent of their volumes in physical and 20 percent in derivatives.
“This means that if there is a run in the market and everyone wants to buy they will not be able to provide all these gold. Second, ATF is a trust unit, a promissory note. This promise is only good as the well-being of the company,” he added.
“Physical gold is a tangible asset that you can hold, you can have your bar number, the code, the weight and you can register it like a car, it is your bar, something that that either paper gold cannot satisfy,” he said.
“So, if you want to balance and mitigate risk, maintain liquidity and give you price appreciation with very minimum risk, buy gold,” he said.
GOLD TRADING IN PH
The Philippines, he said, is just like China: one cannot import gold and it is subject to 25 percent tax. Only the Bangko Sentral ng Pilipinas can buy gold. As a result, all gold activities in the Philippines are done offshore.
“I can tell you most of the wealthy Filipinos have gold, they come to Hong Kong and buy and put it in suitcase and bring it to the Philippines and not pay tax,” he said.
Since gold is not freely tradable in the country, they lose the value. “99 percent in the Philippines is also smuggled out,” he said.
He, however, noted the new law signed by President Duterte allowing small miners the flexibility to sell gold at lower taxes is a good step.
“Gold should be traded freely,” he said citing developed economies in Singapore, Hong Kong, EU and North America where gold is traded freely like a currency.
He said he does not know anyone who wants to buy a gold mine in the country, but “Frankly, I think first the BSP better change their policy to a more open and transparent market so the industry can grow quite substantially.”
“You need to incentivize people to abide the law and to do honest business,” he said.