Gold will continue to play an important role in financial markets in the next few years as the risk of currency depreciation continues to intensify and investors and central banks look for safer alternatives, says Saxo Capital Markets.
In ” Gold: Just another currency? ” Saxo Capital Markets UK explores the extent to which the metal will rise in prominence as a proxy currency. This article is the last chapter of Saxo’s e-book, FXdebates series – Trading Insights from our Top Analysts, which focuses on trends in currency movements and pairings, the challenges affecting FX traders and advice on key trading strategies.
Comments Ole Hansen, Head of Commodity Strategy at Saxo Bank:
“The combined amount of gold now used to back Exchange Traded Products has, despite some major reductions during February, risen to a level only exceeded by the national reserves of two countries (USA and Germany). Even though gold is not money, it is nevertheless increasingly being accepted as an alternative to cash by major clearing houses as collateral for trading futures, stocks and interest rate products. This is a trend that is expected to continue, thereby further boosting gold’s status as an alternative to money.
“The allure of gold, which has maintained its popularity throughout centuries as a store of wealth, is no less valid today despite some recent hesitancy following a decade of strong gains. Investors are still looking for an alternative to money as the risk of debasement is still elevated, with central banks continuing to diversify their currency reserves away from the dollar.
“Gold is actually the world’s third largest reserve asset, after US dollar and euro-denominated assets, with central banks and governments all over the world still holding large reserves. This is because gold helps preserve national wealth and protects against economic instability. Central Bank’s net buying of gold rose by 29 percent in 2012 (source: WGC) and this look set to continue with demand in particular being led by emerging market central banks as they seek a way to diversify from dollars and euros.
“Gold has no doubt lost a bit of its shine into 2013, trading at the lower end of its established range between 1525 and 1800 USD/oz. This has been driven by the assumption that an earlier than expected end to quantitative easing will remove support for gold. Although this is argument carries some weight, one should also look at the reasons for ending quantitative easing one of which is the potential rise in inflation. Rising inflation would off-set rising interest rates, prolonging the period of low or negative real interest rates, which has been one of the supporting themes for gold from an opportunity cost point of view.”
Saxo Capital Markets points out that for the Chinese, gold is now the currency de rigueur to store wealth and hedge risks due to the general distrust of government and central banks’ policies. In light of this, China, already the world’s top producer, is now competing with India to become the world’s top consumer of gold. According to the World Gold Council, these two countries now accounts for 52% of total global consumer demand, a figure that will continue to rise as the middle class grows, thereby supporting demand.
The FXdebates series of articles have been published over the last four months, leading the way to the Saxo Bloomberg FXdebates event hosted at the British Museum on 13 March 2012.
The other articles in the FXdebates series has focused on:
The Euro in Crises
Currency Wars: Battle Of The Weakest
For more information please see: http://uk.saxomarkets.com/fx-debates/pages/gold-ebook
Follow the debates via twitter: https://twitter.com/SaxoMarketsUK
About Saxo Capital Markets
Saxo Capital Markets UK Limited is a wholly owned subsidiary of Saxo Bank A/S, the parent company of the Saxo Bank Group, an international financial services group specialising in trading and investment across global financial markets. Saxo Bank has operated in the UK since March 2006, initially as a branch of Saxo Bank A/S and since 1 January, 2012 as Saxo Capital Markets UK Limited.
Saxo Capital Markets UK offers private investors online trading and investment in FX, CFDs, ETFs, Stocks, Futures, Options and other derivatives, and online wealth management for Funds, Shares, ETFs, Certificates and Bonds. Saxo Capital Markets UK also offers online trading services to a broad institutional client base including Hedge Funds, Introducing Brokers and Money Managers through our award-winning trading platform SaxoTrader, SaxoWebTrader and SaxoMobileTrader and Saxo’s B2B/API services.
Additionally a large base of Banks, Brokers, Asset and Money managers, utilise our award winning white label solutions, in order to provide their clients with access to all or some of our trading platforms and associated liquidity.
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Uriel Alvarado Cancino, Chief Public Relations and Marketing Officer, Saxo Capital Markets UK
Nicholle De Beer, Public Relations and Marketing Manager, Saxo Capital Markets UK