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World Gold Council president says West's investment strategy 'is in crisis'

The present low interest rate environment is driving investors away from negative-yielding securities and into other assets like gold, John Mulligan, president of the World Gold Council, said Oct. 5.

Speaking at the Minex Forum in Moscow, Mulligan estimated that investors were holding roughly US$13 trillion worth of negative-yielding assets right now, and this, combined with the sense of economic uncertainty, was the main reason for the 20% increase in the price of gold so far this year.

“The whole investment strategy of the West is in crisis,” he told the audience.

He said recent Federal Reserve rate decisions had also made professional and institutional investors more uncertain of the economic future.

“The investment community suddenly became aware that the world was not on the road to a sudden and robust recovery — it was actually quite fragile. There were a lot of risks.”

This pushed up demand from exchange-traded gold funds to 580 tonnes of the metal in the first half of 2016, while the second half was looking at coming in around 650 tonnes of demand from ETFs, he said.

“That is driven by a reappraisal of global risk,” he said.

For many fund managers, the biggest reason to move to gold was the “pernicious” spread of negative interest rates.

“An asset class that was previously safe and delivered fixed income can no longer be depended upon. That means the pension funds of the world are holding an asset that actually erodes their value.”

While the top-rated countries have been issuing negative-yielding bonds for some time, now even central and eastern European nations have joined in — the Czech Republic issued a 13 billion koruna bond due 2019 this week priced to yield at -0.42%, according to Bloomberg.

On the outlook for jewelry demand, he said China and India would remain key players, despite recent lower demand from those countries.

China’s economic slowdown and stock market volatility have slightly dampened gold demand, to just under 1,000 tonnes in 2015, Mulligan said.

In India, which consumes a similar amount of gold — about 1,000 tonnes per year, according to Mulligan — a dryer monsoon season in 2015 impacted incomes of farm-dependent rural Indians, who buy about 60% of gold in the country.

But there was room for optimism in both countries, he said.

In India, the forecast for rural incomes in 2016 is good, while in China, the country still had levels of gold ownership that were lower per capita than most other developed nations. State sponsorship of gold was also encouraging purchases, Mulligan said.

He pointed out that there were over 700,000 retail outlets that sold gold bars or coin in the country.

Mined supply

On the other hand, mined gold is not expected to jump significantly, he said.

Global production of the metal has jumped by about 30% since 2008, with production in Russia, one of the biggest producers, increasing by 40%.

“However, we think the rate of growth will be difficult to maintain; we think gold mining will continue to be constrained and production will plateau,” Mulligan said.

He named the difficulties in discovering good gold deposits as the main reason.

“Gold is increasingly difficult and expensive to find. There are very few substantial discoveries to make. Also, the gradual long-term decline in grades is unlikely to be reversed.”

Mulligan also said the low-cost level seen in the industry since the fall in the gold price from its peak near US$1,800 was unlikely to be sustained.

“Costs overall have come down about 26% on average — the question is how long can that be maintained. We are starting to see signs that companies may be struggling to maintain these cost levels. We don’t see further cost cutting of any scale.”