Gold Surging Highlights Scarce Hedge Assets

In January 2016, the global capital market did not give investors a breathing space because of the arrival of the new year. In less than 15 trading days this month, international crude oil prices plummeted 22%, copper prices fell 7%, stocks were also a global green, while the global emerging market currencies fell.

However, during this period, the international gold price in dollar terms rose by nearly 4%, and the price of gold denominated in renminbi rose by more than 5%.

In January 20th, the international gold price benefited from the demand for hedging, which rose by 20 US dollars that night.

The decline in China's market data has further stimulated demand for gold. In the first week of 2016, the gold delivery volume of the Shanghai Gold Exchange (SGE) was 238.165 tons, nearly 5 times that of the previous week's total of 40.9413.

But just a month ago, the market was still expecting, because of the strong fundamentals and the improvement of US economic data, many investment bank reports showed that the role of gold as a hedge asset will be further reduced as the Fed's interest rate increases gradually, and gold prices will fall to $1000.

But in the face of big market changes, expectations tend to run counter to market trends. The Fed's interest rate increases seem to have a greater impact on global stock markets and global emerging markets, and the criteria for investors to choose assets have changed from "guaranteed income" to "security protection".

According to the US Mint data, the US Eagle gold coin sold 801 thousand and 500 ounces in 2015, up 53%; in the first day of 2016, the eagle gold coin sold 60 thousand ounces, which is equivalent to 75% of the total sales volume in January in 2015.

Holding the US dollar may be a better option for global investors who are in the grip of asset shortage. But holding US dollar cash is not consistent with many investors' habits in the US and other zero savings markets. Holding cash can avoid a temporary risk, but in the long run it is more risky to hold cash.

Compared with stock market, bond market and foreign exchange market, the gold market is relatively small. In the rising period of stock market and bond market, the attraction of gold is not very strong, but once the market is turned, the advantage of gold is very obvious.

At present, the value of gold assets only accounts for less than 2% of the total assets value of the world. As long as there is a small amount of capital inflow, the price of gold will rise obviously, which is not only consistent with the demand of international investors seeking security (gold equivalent to cash).

After the financial crisis in 2008, the global central bank expanded the scale of its balance sheet, which changed the definition of risk aversion assets.

Sovereign debt is still attracting investors seeking secure assets, but sovereign debt is no longer seen as a risk-free asset as the world's central bank expands its balance sheet and shifts its risk from the private sector to the public sector.

The possibility of default in some developed countries has increased.

At present, whether the previous "mother robbing gold" or the current upsurge in dollar exchange, it is in fact a market for high demand for risk avoidance.

The development of the financial market for many years can really be realized.

There are still no more options for assets.

In the case of continued pressure on the US dollar, gold is left to investors.

With the decline of stock prices in the US market and the accumulation of risk in the junk bond market, holding the US dollar still needs to bear the overall credit risk of the US.

It will also be difficult to be independent. The risk of overtaking has been increasing. Gold may become the last bastion of asset shortage.

But from another perspective,

During the famine period, a large number of funds did not have a good hedge, and gold became the preferred asset for many years.

With the increasing scarcity of hedge assets, the demand for high quality corporate bonds and sovereign debt and other security assets will continue to increase.

Many banks and investors generally choose hedge assets in the face of uncertain market conditions and regulatory reform pressure.

Generally speaking, hedge assets mean that under the impact of global economic uncertainty, those relatively stable assets that can protect investors' portfolio value will not be seriously affected.

From a globally recognized point of view, gold, US Treasury bonds and the US dollar are undoubtedly the top three hedge species.