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Gold is becoming more and more acceptable in the investment community and especially since interest rates have approached zero and in some countries even gone negative. Until recently no portfolio manager would have mentioned gold and even less recommended it. Since the beginning of the year, soon after some called gold just a useless and worthless rock going down to at least $400, a list of hedge fund managers came out with bullish calls for gold and indicated they have been buying.
After years of denigrating gold, the investment profession is starting to discover the liquidity trap and acknowledge the value of cash and, more specifically, gold and its place in a diversified portfolio. It remains that gold, as a percentage of global financial assets in 2015, represented only 0.58% vs 2.74% in the ‘80s and 5.00% in the ‘60s.
World central banks are much better positioned in 2015 with 14.09% of international reserves, with the U.S. and the Euro Area well above a historically considered prudent level of 10% in a balanced investment portfolio.The world average is 9%. The U.S., with 74.9% , and the Euro Area, with 55.9%, are well above that, while Canada, with 0%, is well below.
In a recent (May 11, 2016) interview Solita Marcelli, fron JPMorgan Private Bank, said, “Central banks may consider diversifying their reserves [as they anticipate] negative rates on existing holdings,” and, “Gold is a great portfolio hedge in an environment where the world government bonds are yielding at historically low levels.” She also added that, “Gold is looking more and more attractive every single day … As a non-yielding asset, it has a minimal storage cost, so when you compare it to negative-yielding assets, it actually has a positive carry.”
In a May 3rd, 2016 article Kenneth Rogoff, former chief economist of the IMF and Professor of Economics and Public Policy at Harvard University, recommends that developing countries and, more specifically, China increase their gold reserves above 10%. For China to increase its gold reserves from the present 2.2% level to more than 10%, it would mean a substantial increase in gold purchases, which are already high. If only China of all the developing countries would do it,
it would have a significant impact on the visible gold market, which was only 4,455 tonnes in 2015. I and most gold analysts think China already has 4,000 tonnes of gold in its possession, but not accounted as official international reserves. All China would have to do is switch those gold holdings from the other institution that holds it to the Popular Bank of China (PBOC).