Market update

Central bank reserves are typically constructed according to three guiding principles: safety, liquidity and return. The Covid-19 pandemic has reinforced the significance of these principles and, by extension, the importance of smart and sustainable reserve management. 

Since the start of 2016, assets in European gold-backed exchange traded products (ETPs) have grown rapidly, hitting a record high of 1,121.4t (US$48bn) in Q1 2019.

Following the launch of the AAOIFI Shari’ah Standard on Gold in 2016, we have engaged with Islamic banks and financial institutions to develop the market for Shari’ah-compliant gold-backed products. As part of this we undertook research to understand how investors view Islamic finance, their attitudes towards gold, and preferences for gold-backed products.

On 20 November, LBMA published for the first time weekly trading volume data through LBMA-i – its new reporting service, which delivers greater transparency and insight into the over-the-counter (OTC) gold and silver markets.

Gold is an important part of central banks’ foreign exchange (FX) reserves. According to the International Monetary Fund (IMF), at the end of H1 2018 central banks collectively owned US$1.36tn of gold, around 10% of global FX reserves.

The 2005-2013 boom in Chinese gold jewellery demand was followed by a fallow few years, which saw demand shrink by one third. But there are green shoots of recovery emerging.

India, a nation that accounts for around a fifth of annual global gold demand, has a long history of gold-focused policies. These, however, have often distorted the market rather than achieving policymakers’ aims. Announcements in the Union Budget on 1 February 2018, however, suggest this might change.

Changes are afoot in the technology sector. Smartphones are becoming increasingly powerful, electric and self-driving vehicles could revolutionise the automotive industry, and emerging nanotechnology could transform solar energy. All of this could have a positive impact on gold demand.

Germany’s gold investment market has boomed in the past 10 years. In the face of successive financial crises and loose monetary policy, German investors turned to gold to protect their wealth.

On 1st July, India’s labyrinth of taxes will be replaced with a simple, nationwide Goods & Services Tax (GST). This is the biggest fiscal reform since India’s liberalisation in the early 1990s. While gold consumers will face a slightly higher tax rate, and the industry will go through a period of adjustment, we see the net impact on the gold industry as being positive. The gold supply chain should become more transparent and efficient, and the tax reform can boost economic growth, which we see as supporting gold demand.