The Long and Short of Gold

The Long-Term: The China Connection

 

 

Few in the US are familiar with China’s “Belt and Road” initiative, but they should be. The reason: It is the largest infrastructure and trade plan on Earth.

The Belt and Road initiative is a long-term project to develop infrastructure throughout Asia, Africa and Europe. The words “belt” and “road” refer to land routes and sea lanes as means of trade. The massive endeavor will cover over 68 countries and more than half of the world’s population. These numbers are staggering and some estimate the project accounted for up to 40% of the global GDP as recently as 2017.

A program of this size requires serious investment. This is where gold comes into the picture.

The countries involved all have differing levels of gold reserves. Research shows that the area covered in the Belt and Road initiative represents approximately 80 percent of global gold consumption.

As a result, countries like China are allocating resources to gold mining efforts. For example, one of China’s largest gold mining companies, Zijin Mining Group Co, has embraced a global strategy. Today, they have three projects within the “Belt and Road” region.

Mining projects like this will be critical in supporting the ongoing infrastructure plan especially as developers seek ways to fund projects without a heavy reliance on credit. “Over time this could boost the depth of liquidity in China’s gold market,” explains the Head of Commodity Markets’ Strategy at The Bank of China. It’s not surprising to learn that at the end of last year China identified gold resources totaling 13,195 tons.

As gold becomes a more important source of funding, because of the Belt and Road initiative, gold purchasers may see their investment rise.

The Short-Term: The VIX Starts to Twitch

Volatility is back and so is gold. This month alone gold is up 3.2%. Concerns about global growth prospects and already high equity valuations have eroded investors’ confidence. “There have been doubts whether gold is a safe haven, but the reaction to recent equities moves has confirmed that it is,” remarked a commodity analyst at Julius Baer.

Some have concluded that economic growth in the US peaked earlier in the year and that we face a downhill path. Moreover, Federal reserve growth rates mirror this outlook given that officials project 2.5% on 2019, then, 2.0% in 2020 and finally, 1.8% in 2021.

Gold investors can use this valuable three-year project to start planning today. As growth rates fall, equity markets are unlikely to repeat the significant gains we’ve seen over the past nine years. At the same time interest rates will continue to increase as Jerome Powell has made clear his intention to incrementally increase rates. This rise will make bonds a more attractive investment which will further encourage investors to reduce their equity holdings which will drive stocks lower. In these conditions we may see gold continue to rise given its “haven” status.

We’re already seeing early indications of this inverse phenomenon. With most analysts in agreement about the future of the US economy, clearly the time to own gold is now.