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Investors in two minds: should they continue to buy gold?

Investors in two minds: should they continue to buy gold?

The World Gold Council reports that there is still interest in the precious metal. Its reserves in exchange-traded funds (ETFs) set a maximum level of 3510 tons, and the increase of assets in such funds is also huge — $33.7 billion. In May, the increase in reserves amounted to 154 tons, and the inflow of funds reached $8.5 billion. In April it reached 170 tons, which is equal to $9.3 billion. According to the results of the first quarter, the aggregate interest in the metal increased by 80% and renewed the 4-year maximum of 639.6 tons.

The reason for investors’ commitment to gold was the disagreement between America and Iran, the breakdown of the OPEC+ agreements, which led to the collapse of oil prices, and the announcement of the COVID-19 pandemic by the World Health Organization. As a result, in the spring the price of the precious metal reached $1,700 per ounce for the first time in eight years. On June 1, the price skyrocketed to $1,744, and on June 9, the asset stopped at around $1,717. However, at the moment, the situation is developing in the opposite direction. Investors are actively selling gold, ETFs and shares of gold mining companies, and traders enter into short deals at the fall of the asset. The owners of the precious metal “shift” their funds into securities, since they show positive returns.

The interest in gold has definitely diminished in comparison with spring indicators. Compared to other commodities, the situation with gold will definitely be worse. In the spring it was doubly in a fortunate position. Firstly, investors urgently diversified their own capital, and secondly, regulators of many countries pumped “helicopter” money to support the economy, which also affected the metal. At the moment, depositors are not interested in protecting gold.

Part of the funds that went to gold now goes to other commodities – oil, copper, aluminum, nickel and others.

Timur Nigmatullin, investment manager of Otkritie Broker, is sure that today the gold market is clearly overheated, so that its price can fall to $1,500 per ounce. He also accepts the possibility of the crisis that occurred a decade ago, when depositors were confident that government stimulus could cause hyperinflation.

In 2011, regulators pumped money into the economy. In parallel, the price of gold leaped from $1000 to $1900. However, later, depositors began to actively get rid of the metal, since it became uninteresting as insurance against dollar inflation. Today the situation is repeating itself, but it is hoped that governments will do everything possible to ensure that investors don’t need insurance.

Investors are in two minds. On the one hand, the market is overflowing with liquidity, and on the other, it is still unclear how the epidemiological situation will develop.

Eduard Kharin, managing director of Alfa-Capital, said that he advises leaving part of the investment portfolio in gold. This year it is still possible to catch a massive transition of depositors from EM bonds to precious metals, as asset volatility persists.


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