The Strategist

Investors are buying up precious metal while the US government is paralyzed

01/23/2018 - 12:54

Partially stopped work of the government and all US public services is forcing investors to increase the share of protective assets in their portfolios. The total assets of exchange gold funds reached 2,250 tons, and this is the highest value since May 2013. The demand of institutional investors, as well as the weakening of the dollar, support the growth of gold quotations.

Bullion Vault via flickr
Bullion Vault via flickr
The assets of exchange index funds investing in gold have renewed the multi-year high. According to the latest data of the Bloomberg agency, they grew by almost 8 tons and reached 2249 tons last Friday. This is the maximum value since May 15, 2013. Since the beginning of the year, the assets of such funds have grown by 25 tons, while only for the last three days - by 22 tons. The main inflow of client funds fell to the world's largest stock market SPDR Gold Trust, whose assets grew by 9 tons in two weeks, to 846.5 tons.

Investors are buying up precious metal because of political tension in the US, where at the end of last week, for the first time since 2013, shutdown was announced, which implies a partial halt to the work of the government and all government services due to lack of funding. After the Republicans could not recruit 60 votes in the US Senate for the adoption of the new budget, all US federal agencies should now send many of their employees to unpaid leave. Only employees of critical departments will continue to work, including civil servants, postal employees, and organizations whose activities are not financed from the budget.

The demand for gold is also supported by investors' concerns about the levels at which risky assets are traded. According to Bloomberg, since the beginning of the year, the world's major indices rose by 5-11%. Some of them, for example, the US index Dow Jones, rose to historic highs. Increasingly, investors think that the markets have entered a late stage of growth, which implies that it is worth to increase the proportion of protective assets that can feel good in the conditions of correction.

The high interest of professional investors in precious metals positively affects its value. On January 15, the price of gold rose to the highest level since September last year - $ 1344 per ounce. Yesterday, according to Reuters, quotes were fixed near the $ 1334 per ounce mark, having added 2.6% since the beginning of the year. "At present, the precious metal is traded as a currency, and not as a commodity. Therefore, the dynamics of the dollar is the main driver in the gold market (the dollar has lost to the world's leading currencies of 1.5-3% since the beginning of the year)," says Carsten Menke, commodity market analyst at Julius Baer.

However, analysts are cautious about the prospect of further growth in gold prices. According to Carsten Menke, the impact of stopping the work of government agencies on gold depends largely on its duration and consequences for the US economy. "We forecast the growth of the US currency, which makes us keep a cautious view of the precious metal market," Mr. Menke said.