Protective purchase: what causes the rise in gold prices

The development of the trade conflict between Washington and Beijing spurred gold prices to a record level of $ 1,500 per ounce. Moreover, earlier the cost of precious metals was fixed at around $ 1,535 per ounce - this is the maximum since 2013. In an interview with RT, the head of the Alpari information and analytical center, Alexander Razuvaev, pointed out another reason for the jump. We are talking about the collapse of the market in Argentina.

The financial collapse in the Latin American state was the result of a political factor. So, on August 11, a candidate from left opposition forces won the Argentinean primaries. The country's stock exchange reacted sharply to the news, collapsing to a historic low.

“A severe crisis in one of the key emerging markets could well lead to the collapse of most or even all of these markets. Accordingly, the demand for defensive assets is growing in the world, ”Alexander Razuvaev explained to RT.

According to the World Gold Council, in the second quarter of 2019, global demand for gold increased by 8% compared to the same period last year and amounted to over a thousand tons.

A significant share of demand was formed by central banks of different countries, which purchased a total of 374 tons in their reserves in the first half of the year, with 96 tons of them acquired by the Central Bank of the Russian Federation. In the second quarter, Russia was second only to Poland in the amount of gold purchased. Such data are presented in a study by the World Gold Council.

In an interview with RT, QBF portfolio manager Denis Ikonnikov noted that active purchases of gold by the Central Bank will have a good effect on the country's economy. “Firstly, the gold and foreign exchange reserves of our economy are increasing. Secondly, gold purchases lead to their diversification. Now in Russia, reserves in gold occupy almost 30%, ”the expert said.

According to the Central Bank of the Russian Federation, Russia's gold and foreign exchange reserves at the end of July 2019 increased to $ 520 billion. According to this indicator, the country ranks fifth in the world, behind China, Japan, Switzerland and Saudi Arabia. However, in the Saudis, the share of gold in reserves is only 0.08%. Such data are provided by the World Gold Council.

Together with the replenishment of the gold reserve, Russia since 2010 reduced investments in US government bonds by 14 times. At the end of 2018, they amounted to only $ 13.2 billion, and in June 2019 - $ 10.8 billion. This is stated on the website of the US Treasury. At the same time, against the background of high gold prices, the yield on US government bonds is getting lower. Now this figure is less than 2% per annum.

Experts interviewed by RT noted that an increase in the share of gold in the country's foreign exchange reserves increases the economy's resilience to various geopolitical shocks.

The People’s Bank of China is actively replenishing its gold reserves. Beijing also needs to diversify its foreign exchange reserves in order to reduce the damage from the trade standoff with Washington.

Buying gold is a global trend. The thing is that the central banks of many countries are afraid of the consequences of a trade war, so they buy precious metals for insurance. Isabelle Strauss-Kahn, the former World Bank Chief Financial Officer, talks about this situation in his report published on the website of the World Gold Council. In it, the expert also emphasizes that the trade war is one of the key factors that leads to increased demand for gold.

In the report, Strauss-Kahn also pointed out the advantages of gold attractive to central banks. Precious metal practically does not correlate with other assets, has no credit risks and rises in price during a crisis. In addition, in the long run, gold can bring much greater returns than other popular assets.

It is curious that on August 13, the US Trade Representation issued a press release in which it announced the suspension of the introduction of new duties on Chinese imports until December 15. After this statement, the price of gold in the moment slightly decreased.

“US tariffs triggered a rise in price of various assets, but gold fell in price. But I don’t think that in the future the metal will significantly decrease in price, since a deal between the USA and China is not expected in the near future, ”said Denis Ikonnikov.

In turn, Alexander Razuvaev did not rule out a further increase in gold prices, which is also influenced by the policy of the American Federal Reserve, which had earlier reduced the rate.

“It is still not clear what the policy of the Federal Reserve will be in the future. One way or another, it is unlikely that we will see a very strong dollar that would hit gold. Therefore, the level of $ 1527 per ounce is a good mark, but I think that in the future it will be higher, ”concluded Razuvaev.