Juan Carlos Artigas is the global head of investment research at the World Gold Council in New York, where he is in charge of writing strategic and research notes that put gold in the context of global financial markets. He spoke at the Initiatives in Art and Culture gold conference about global and individual diversification of investments using gold and answered a few questions from JLN Metals editor Nicole V. Rohr.
Q: How has global gold supply and demand shifted?
A: If you looked at demand flow and supply flows a couple of years ago, you would have seen three sources of demand and three sources of supply. On the demand side, you would have had jewelry, investment and technology. On the supply side, you would have had mine production, recycling activities and central banks. As a whole, so collectively, central banks used to be a net source of supply. That trend started to shift little by little, so it was not a sudden move and suddenly central banks were buying. It was a graduate transformation, and over the past couple of years… central banks as a whole have become a net source of demand. When you look at that picture today, you see four sources of demand and two sources of supply.
Central banks have turned from net sellers into net buyers. The rationale is the same: diversification. When we saw selling in gold through central banks, it was primarily driven by European central banks diversifying away from gold. What we are seeing now is emerging markets’ central banks diversifying in part away from the dollar by including gold in their foreign reserves. And we expect that trend to be here in the sense of diversification and managing the reserves, and we have seen this structural shift in their behavior.
Q: How does idea of diversification apply to the individual investor?
A: That is very interesting, I think, because if it makes sense for central banks to use gold as a diversifier, it makes even more sense for an individual to use gold as a diversifier. And part of the reason is the following: Think about what central banks hold. Central banks only hold sovereign debt… Most of those assets tend to have low volatility. They are coupons. So, it’s a very conservative, in some sense, set of assets. It is very correlated, but it’s fairly conservative in the typical sense of the word.
When you go to an investor’s portfolio, the investor’s portfolio is going to have stocks, it’s going to have bonds, and it’s going to have many other things. The profile is typically riskier in the sense that you have more volatility, you may have less liquidity, you are maybe exposed to more counterparty risk, etc. In that context, gold is very important. Why? Because it’s providing diversification. So, it’s not going to react in the same way that stocks do or bonds do or other commodities do, or even some of the less liquid assets like private equity [do]. On the other hand, it’s preserving wealth, so it hedges against inflation over the long term and it provides also a hedge against the dollar, the currency. And it typically performs very well when you have a systemic problem in an economy – a financial crisis, an economic crisis. Gold is going to be able to provide liquidity. You can count [on the fact] that gold is one of the assets that you can use to raise cash if you need to, and it’s also going to be going up in terms of an asset that investors go to to preserve wealth, so capital preservation. In that sense, with the capital preservation aspect, with the portfolio risk management aspect, gold is crucial.
Q: Why are people surprised that the U.S. is one of the top three producers of gold in the world?
A: Not so many people really understand the gold market. That really stands out. Investors in the U.S., I think, tend to be very U.S.-centric, for good reason. For many decades, the U.S. was the driver of the global economy, the U.S. currency was the currency reserve of choice, and many of the things that happened in the U.S. would drive events around the world. The problem when you extrapolate that same behavior to gold is that the U.S. is only one part and one component of the overall gold market. When you only see the U.S., you forget that there is 87 percent of demand that is not coming from there. So, what has happened is that investors have typically seen factors and assets and everything in the context of the U.S.
For gold, when you haven’t really seen too many things about the outside world, you tend to think, “Well, what was [happening] in the 1970s?” Well, gold was coming from Africa, and people haven’t really been following the market, so they don’t understand the market so much and haven’t realized how diverse the supply chain is, as well. But for some reason, it hasn’t sunk in that the U.S. is a very important, strong producer of gold, and that also helps gold in being a far more stable asset because it’s less subject to the same idiosyncratic or geopolitical risks that many commodities tend to experience.