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Bullion back in fashion against paper money

Wide acceptance of negative interest rates and sharp EM currency devaluation help drive up gold prices

A single ounce of gold is currently worth more than US$1,250, having rallied from around US$1,080 at the end of last year.


US presidential candidate Donald Trump has been derided for (among other things) his apparent desire to return the United States to some form of gold standard. But with negative interest rates becoming widely accepted - and "helicopter money" possibly on its way - gold is suddenly coming back into fashion against paper money.

Gold is not alone among commodities to enjoy a bounce-back in price after a long bear market, said Kenneth Courtis, former vice-president of Goldman Sachs Asia and now chairman of commodity group Starfort Holdings. "Several key commodities have had monster rallies," he noted, instancing iron ore among others.

But there are factors particular to gold that suggest its role as an attractive repository of value (rather than a general stabilising of commodity markets), analysts suggested.

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The immediate key to the sharp upward price move for gold seems to be the accelerating acceptance of negative interest rates as a tool of monetary policy - first in the US, then by the Bank of Japan and now with renewed zeal by the European Central Bank (ECB).

"Negative interest rates are mega positive for gold," William Thomson, a former US Treasury official who is now chairman of Private Capital, Hong Kong, and a director of Finavestment, London, commented to The Business Times.

Gold is normally seen as having a "carrying cost" or cost of storage while bank deposits yield positive interest. But that position is changing with negative interest rates imposing a carrying cost on money instead.

With incentives growing to close bank deposits (for which holders are penalised now in some cases), gold is being seen as superior to cash, which needs to be held in relatively small denominations.

By contrast, a single ounce of gold is currently worth more than US$1,250, having rallied from around US$1,080 at the end of last year.

Meanwhile, a move out of bank deposits has spurred a demand for much larger-denomination bank notes in Europe, while in Japan nervous cash holders are boosting demand for physical safes.

Another factor that is driving the upward movement in gold prices is the sharp devaluation in a number of emerging market currencies in recent times, making holders of those and other currencies highly nervous of holding cash or bank deposits. Gold is now "at an all-time high in terms of the South African rand and it is flirting with (an all-time high) also in terms of yen, the Australian and Canadian dollars and also looking good (against) the euro and the pound," pointed out Mr Thomson.

"At a time when central banks are engaged in unorthodox monetary policies, including quantitative easing (QE), zero interest rate policies and negative interest rate policies, gold's role has never looked sounder," he added.

If the zero interest rate policy fails, "then monetary policy will be largely exhausted and the next step will be increased fiscal (stimulus) - possibly with 'helicopter money' being deposited into taxpayers' bank accounts in the form of guaranteed incomes, as is being discussed in Switzerland, Finland and Ontario".

Gold enjoyed a dramatic bull market from 2001 to 2011 when the price went from around US$250 an ounce to over US$1,900 before correcting to nearer US$1,000 by December 2015.

Few are expecting anything so dramatic now, although some economists say that if the "velocity of circulation" of money were to pick up, on the back of reservations over holding cash, or in response to rising economic activity, the potential for inflation would be huge given the vast amount of new money created by central banks.

Inflation could then be expected to push gold prices higher, possibly sharply higher, they suggest.

Also, as Mr Courtis pointed out: "There has been a big debt-driven expansion of gold production, so debt has become a problem for miners. There is no new investment in gold mining. The amount mined peaked some years ago and output will keep declining (which will also tend to push prices up)."

Gold has "moved more than US$100 higher since the beginning of this year and is now spreading a mild case of gold fever among investors", Stephen Innes, senior foreign exchange trader at currency specialists Oanda Asia-Pacific in Singapore, told clients recently.

"Gold's strong run this year may still have legs, as bullion continues to rise even though markets have stabilised," Mr Innes added. "Another good sign - the price of gold futures has climbed more than 18 per cent this year."