Gold and silver are first on the list of long-sightedinvestment-Maxim Hanin, leading expert of Alpari gold

19 Jul 2016

“If we consider gold as an investment of money, in a period of economic uncertainty, it must be the first on the priority list. At the moment, we have a great upward medium-term trend of the yellow metal, and there are no long-term factors that could radically change the current situation. By the end of June, the gold prices rose by 9% to $1325.7 an ounce, but from the beginning of the year, gold has shown an increase of 25%. The result of the referendum in the UK shook the traders, forcing many investors to transfer a significant portion of assets in safe-haven assets, one of which has traditionally been gold.Expected negative consequences for the global economy have allowed the precious metal to overcome the psychologically important mark of $1,300 per troy ounce. Gold, being“safe haven” due to historical reasons, traditionally increases at the time of uncertainty not only in financial markets but also in the period of geopolitical instability. Of course, such driver as the uncertainty is limited in time, and as times goes by, the price quickly recedes.On the other hand, the impact of the UK decision to exit from the European Union can trigger a chain of adverse events for financial stability. Additional support for gold became the postponement of the expected interest rate increase in the United States. Against the background of the referendum results, futures on the federal funds rate traded on the CME market have fallen.Investors mostly evaluate the probability rate hike in July, September and November as a zero, but there are those who believe that the US Federal Reserve will be forced to lower its key rate, returning to quantitative easing. The probability of a rate cut in July is estimated by investors at 1.2% in September and 7.1% inNovember.The nearest rate increase with the probability of 13.3% is expected only in December. The negative value of a key US real interest rates, calculated as nominal federal funds rate minus consumer price index (CPI), is a key factor supporting gold. The point is that the yellow metal is sensitive to alternatives that offer potential passive income, such as bonds or ex-dividend stock.In addition, the decline of yield of US Treasury bonds also prepares a fertile ground for gold bulls. The graph below clearly shows negative correlation between US Fed real interest rates, the 10-year US Treasury bonds and gold prices. Throughout the historical sampling since 1970,a decline in real interest rates below zero was always accompanied by the rapid growth of precious metal prices.Brexit spawned the escape of investors, not only in assets such as gold, but, in particular, in US dollars. In this regard, the US Fed has less room to maneuver in order not to provoke a decrease in the level of inflation with a new tightening of monetary policy. Therefore, we believe that the regulator refrains from further interest rate increase in the near future, which will support gold in the medium term. Nevertheless, in the short term, gold is likely to return to the range of $1,200-1,300 per troy ounce within the corrective movement.The COT (Commitment of Traders) report, including data on the positions of large speculators on the eve of the UK referendum,has showed that the net long positions of large gold speculators amounted to 292,729 contracts, becoming an absolute record in the history of statistics. The gold market is overheated, and, after strong movement, the short-term speculators should take profits, which will provoke a wave of sales and corrective movement of the precious metals.Silver, like gold, is often in demand as a safe investment, but it is more susceptible to the supply and demand factors. According to forecasts of CPM Group, a reduction of silver ore production by 2.4% will happen in 2016 for the first time since 2011. Silver Institute also predicts the reduction of supply on the market in 2016 by 5% with the increase of demand for it as an investment product.According to the Institute, in 2015, demand for silver declined by 22.5 million ounces in industrial production, however, increased consumption of silver as bullion and investment coins by 56.2 million ounces. As a result, the total global demand for silver has increased by 3.4%. From the beginning, the silver often renewed the local maxima and sometimes was ahead of gold at the monthly returns. It is already clear that the demand for silver as a means of saving and investment in 2016 significantly increased. According to the US Mint, almost 4.5 million ounces of silver were sold in May 2016, which is 122% more than in the same period of last year.Statistics on investment gold coins in May looks even more impressive: sales growth amounted to 206%. For investors in the ruble zone, the investing in precious metals is a good alternative to foreign currency deposits. Foreign currency deposits since the beginning of the year showed a negative profitability due to the strengthening of the ruble, while gold and silver brought to its investors in the first half of 2016 by 9.1% and 16.9%, respectively.At the same time, during the devaluation of the ruble against other foreign currencies, gold and silver are not far below the foreign currency investments, due to the fact that these assets are traditionally priced in US dollars. In the period from 2014 to 2016, the Central Bank book prices on refined gold nearly doubled, to 1229 rubles per gram (97%). Professional investors, as a rule, use virtual gold: spot, an ETF, futures, options, stocks of gold mining companies.People, however, traditionally use physical gold. The most common way is still investing in gold bullions; however, gold coins are gaining more and more popularity. Gold coins are particularly popular among long-term investors. They are monotypic and are easy to buy. The main advantage of the gold bullion is an exemption from VAT on the purchase of gold coins, because they have a nominal value, ie they are a legal tender.In this regard, the gold coins are exempt from taxation in accordance with paragraph11 of clause  2 of Art. 149 of the Tax Code, which reduces its cost to the end user as compared to gold bullion.Along with all the advantages of coins,they have a number of disadvantages. These include the complexity of pricing: in addition to the price of gold contained in them (which may vary), the numismatic (collectible value) value of the coin is also important”, noted Maxim Khanin, leading expert at the Alpari Gold.

Source: SIA