MARKETS & INVESTING
Are emerging markets now driving gold ?
Undoubtedly , factors outside the US are to blame for this relationship breakdown . The clearest example is emerging markets . Beginning after sanctions froze Russia out of the dollardenominated global trade system , weaponising the dollar has led to suggestions that emerging markets want to diversify from the dollar and have stockpiled gold in response . Central bank purchases are not enough to justify the gold rush on their own ; the wider risks that come with the fragmentation of global finances have most likely driven individuals to buy gold too . In particular this year , Middle Eastern and Asian buyers have bought the precious metal , in response to heightened risks or tensions . Chinese buyers are probably a big factor behind gold ’ s ascent . China ’ s citizens have found few domestic assets which will give a return above inflation . Opportunities to move money abroad have been shut down by the government , while banks give poor rates on deposits and are not well-trusted . Chinese citizens appear to have been buying gold as a way to keep money out of the system . Indeed , we think it has had such an impact on gold markets that , at points this year , we have used gold prices as an indication of consumer confidence in the Chinese economy .
Gold isn ’ t an investment
The last explanation for the gold rush , at least in recent months , is simple momentum . Trend investing has become much more prominent in the era of algorithmic trading and has almost certainly contributed to gold demand . However , trendmomentum trades can often mean larger down swings and the fact gold ’ s rise has so many disparate influences makes it harder to predict when that might happen . If the Chinese government ’ s economic stimulus works , we would expect Chinese citizens to stop buying as much gold . Further , emerging markets ' gold purchases will drop off eventually too , because central banks can only diversify their dollar-based holdings so much – and there are tentative signs that net purchases are already falling . Gold ’ s nearer-term future promises to be volatile . Prices might struggle to gain and could well fall if Chinese demand falters , but equally , there may well be more short-term gains to be had . So , betting on sustained gold price rises - if not a mugs game is close to it , and it is not a safehaven except during extreme events in society . Not many remember that gold had one of the longest drawdown periods of any asset in modern history , between 1980 and 2007 . If you bought gold the last time it rallied this hard – the late 1970s – it would have taken you nearly 30 years to get back to the price you bought it at , and that ’ s a long time to wait .
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