Quantum Leap For ABN AMRO As It Questions Gold Price Discovery
The article, titled “A world with two gold prices?”, questions how, if gold is a safe haven asset, its price has not continued to reflect the ongoing crisis and stress in financial markets.
Boele then seeks an explanation of this puzzle in terms of a framework which consists of both safe haven gold demand and speculative gold demand, one of which reflects the purchase of physical gold (safe haven demand), and the other which speculates on the gold price via paper and synthetic gold products (speculative demand) which are not physically backed by gold.
https://www.zerohedge.com/commodities/quantum-leap-abn-amro-it-questions-gold-price-discovery
Translated from the original: https://insights.abnamro.nl/2019/12/een-wereld-met-twee-goudprijzen/
A world with two gold prices?
In my previous columns I indicated that the demand for gold as a safe haven has decreased and that the demand for gold as a risky investment has increased. Yet this is something that many investors probably don't want to hear. They point to the fact that there were many uncertainties this year. This is absolutely true. However, if gold is only a safe haven, then its "behavior" was different from what we have experienced in recent years.
The gold market has been open to the large investment public since the end of 2004, which has since been able to invest more easily in gold. But the investment horizon and objectives differ per investor. There are investors who buy gold as the ultimate safe haven. They buy physical gold and keep it in a safe (at home or at an institution). As long as this gold is in the investor's name, he is the owner (contractually established). In addition, there are also investors who invest in gold products that are physically covered. For each product, however, a thorough assessment must be made of who is the ultimate owner of the physical gold and whether other risks have been added. There are also investors who bet on price fluctuations. However, these products are not always covered by physical gold. This includes an account in gold, exchange-traded products without physical gold coverage and synthetic products without physical gold coverage. In short, it means that investors can find an appropriate gold investment for every investment goal and investment horizon.
Investors who buy gold as a safe haven are often patient investors. They are not easily influenced by short-term fluctuations. If they find the gold price relatively attractive compared to the long-term outlook of the financial system, for the economy and the financial markets, they will buy gold. There are also many investors who want to make money with the short-term fluctuations of the gold price. They provide more mobility for the gold price.
What happened during the global financial crisis of 2008? As the stress on the financial markets increased, the gold price rose, as investors bought more gold. This trend continued until the climax of the liquidity crisis. At that time, investors were selling gold and other investments in exchange for dollars. Then it became clear that for some investors, cash was more valuable than gold. But who exactly were the investors who then sold their gold? Were it the investors who had physical gold in the vault in case the entire financial system collapsed? Or was it the investors who speculated with gold? The first group of investors would think about selling gold three times, the system seemed to collapse but in reality it had not collapsed. The panic was especially great among speculators who needed cash instead of a gold investment.
Now let's go one step further. Suppose there are two gold prices. A gold price for only physical gold and a gold price that represents all other gold products on paper. What would the behavior of these two gold prices be like? In well-functioning financial markets without panic, the gold price representing physical gold is likely to rise less rapidly (if there is a positive trend) and to be less volatile than the other gold price. In the situation of a financial crisis, however, the gold price representing physical gold will rise much faster than the others. All in all, the speculative demand for gold has made the gold price more volatile. In addition, gold behaves less as a safe haven. The only safe form of investing with zero confidence in the financial system is still investing in physical gold. In the case of two gold prices, the price of physical gold will mainly act as a safe haven. The other gold price is more of a financial asset and can serve as an anti-dollar investment.
The article, titled “A world with two gold prices?”, questions how, if gold is a safe haven asset, its price has not continued to reflect the ongoing crisis and stress in financial markets.
Boele then seeks an explanation of this puzzle in terms of a framework which consists of both safe haven gold demand and speculative gold demand, one of which reflects the purchase of physical gold (safe haven demand), and the other which speculates on the gold price via paper and synthetic gold products (speculative demand) which are not physically backed by gold.
https://www.zerohedge.com/commodities/quantum-leap-abn-amro-it-questions-gold-price-discovery
Translated from the original: https://insights.abnamro.nl/2019/12/een-wereld-met-twee-goudprijzen/
A world with two gold prices?
In my previous columns I indicated that the demand for gold as a safe haven has decreased and that the demand for gold as a risky investment has increased. Yet this is something that many investors probably don't want to hear. They point to the fact that there were many uncertainties this year. This is absolutely true. However, if gold is only a safe haven, then its "behavior" was different from what we have experienced in recent years.
The gold market has been open to the large investment public since the end of 2004, which has since been able to invest more easily in gold. But the investment horizon and objectives differ per investor. There are investors who buy gold as the ultimate safe haven. They buy physical gold and keep it in a safe (at home or at an institution). As long as this gold is in the investor's name, he is the owner (contractually established). In addition, there are also investors who invest in gold products that are physically covered. For each product, however, a thorough assessment must be made of who is the ultimate owner of the physical gold and whether other risks have been added. There are also investors who bet on price fluctuations. However, these products are not always covered by physical gold. This includes an account in gold, exchange-traded products without physical gold coverage and synthetic products without physical gold coverage. In short, it means that investors can find an appropriate gold investment for every investment goal and investment horizon.
Investors who buy gold as a safe haven are often patient investors. They are not easily influenced by short-term fluctuations. If they find the gold price relatively attractive compared to the long-term outlook of the financial system, for the economy and the financial markets, they will buy gold. There are also many investors who want to make money with the short-term fluctuations of the gold price. They provide more mobility for the gold price.
What happened during the global financial crisis of 2008? As the stress on the financial markets increased, the gold price rose, as investors bought more gold. This trend continued until the climax of the liquidity crisis. At that time, investors were selling gold and other investments in exchange for dollars. Then it became clear that for some investors, cash was more valuable than gold. But who exactly were the investors who then sold their gold? Were it the investors who had physical gold in the vault in case the entire financial system collapsed? Or was it the investors who speculated with gold? The first group of investors would think about selling gold three times, the system seemed to collapse but in reality it had not collapsed. The panic was especially great among speculators who needed cash instead of a gold investment.
Now let's go one step further. Suppose there are two gold prices. A gold price for only physical gold and a gold price that represents all other gold products on paper. What would the behavior of these two gold prices be like? In well-functioning financial markets without panic, the gold price representing physical gold is likely to rise less rapidly (if there is a positive trend) and to be less volatile than the other gold price. In the situation of a financial crisis, however, the gold price representing physical gold will rise much faster than the others. All in all, the speculative demand for gold has made the gold price more volatile. In addition, gold behaves less as a safe haven. The only safe form of investing with zero confidence in the financial system is still investing in physical gold. In the case of two gold prices, the price of physical gold will mainly act as a safe haven. The other gold price is more of a financial asset and can serve as an anti-dollar investment.
