Economic recovery, low interest rates set tone for gold's performance

GOLD was one of the best performing assets in 2020. By early August last year, the LBMA Gold Price PM reached a historical high of US$2,067.15 an ounce, as well as record highs in all other major currencies including the euro, sterling and Japanese yen.

While the gold price subsequently consolidated below its intra-year high, it finished the year up by 25 per cent.

Gold's performance was supported by both individual and institutional investors turning to gold to mitigate the economic and financial risk and uncertainty brought about by Covid-19.

Other factors came into play, including the low interest rate environment and positive price momentum - especially during the spring and summer of 2020.

However, there was another side to gold's story in 2020. Consumption demand across the world, including key markets like India and China, declined due to a combination of lockdowns and general economic uncertainty. This is nothing new - institutional investors and individual consumers react differently in times of economic uncertainty and we often see investment demand outpacing retail consumption during downturns.

Gold investment to react to rates, inflation

The outlook remains uncertain. While vaccination programmes are picking up steam around the world, we still do not know what the timing and nature of the eventual economic recovery will look like.

Investors are still concerned about the potential risks resulting from expanding budget deficits which, combined with the low interest rate environment and growing money supply, may result in inflationary pressures.

This concern is underscored by the fact that central banks, including the US Federal Reserve and European Central Bank, have signalled greater tolerance for inflation to be temporarily above their traditional target bands.

Despite their move up, interest rates remain historically low levels. Such prolonged low interest rate environment has continuously pushed valuations in the equity markets higher which, in turn, may result in strong market swings and significant pullbacks.

These could occur, for example, if vaccination programmes take longer to roll out or are less effective - than expected, given logistical complexities or the high number of mutations reported in some strains.

Economic recovery to benefit consumer demand

In larger consumer markets - especially in China - consumer demand will likely rebound. At the time of writing, the World Gold Council's Q1 figures have not been published but a key indicator to look out for will be consumer demand in the large markets of Asia in particular - China, India, Vietnam and Thailand.

Pulling all this together, we expect that the need for effective hedges and the low-rate environment will keep investment demand well supported.

A major role of the World Gold Council is to increase understanding of the role of gold in the financial system.

We have developed a freely available quantitative valuation tool called Quarum SM. Quarum allows investors to assess how gold might react in different economic environments.

Singapore's role

Singapore plays an important role in the gold market. As a wealth management hub it is a key component in the gold ecosystem and is a major location for the storage of gold - particularly for the private wealth sector - as a major trading hub, and a physical centre for gold.

Gold is refined in Singapore for the regional and international market, and investors look to the safety and security of Singapore to store their gold holdings.

As Asia continues to grow, and the regional elite look to Singapore to invest and protect their wealth, Singapore is likely to continue to develop as a major gold market hub.

According to our latest data, Singapore as the second highest per capita consumption of gold in Asean and the second highest in East Asia after Hong Kong.

Singapore is also a major source of innovation. It is one of the largest fintech hub in the world.

Fintech gold companies - offering digital platforms to buy, store, and sell physical gold - are driving innovation in the sector and are increasing access to gold in harder to reach markets. Many of these are looking to Singapore as a regional operating hub.

• The writer is head of Asean and policy at the World Gold Council.