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This month, the London Bullion Market Association published a new edition of its quarterly journal called “Alchemist.” What can we learn from this publication?

Three articles caught our attention. One piece is about the history of the Singapore Bullion Market Association and its role in shaping Singapore as a gold hub for Asia. The second focuses on the links between the Chinese and international gold prices. According to the analysis, there is evidence that Chinese demand has a modest, but positive impact on the international price of gold. However, this relationship holds only in the context of a more complex model (including the U.S. dollar and some lags of the impact of Chinese demand on gold). Our own analysis suggests that the impact of Chinese demand on the precious metals market is often overstated by analysts.

The third article, entitled “Gold Demand Highlights Economic Risks – Global Uncertainty Impacting the Precious Metals Market” was perhaps the most interesting. The author, Ben Robinson, shows that “since the end of the gold standard in the early 1970s, gold’s role in the world economy has closely tracked periods of economic and political turmoil, expanding when confidence declines and retreating when confidence returns”. He points out that a series of challenges for the global economy over the next few years may have implications for the precious metals market: Brexit (investors should remember that the longer-term impact on gold depends in part on the response of the European Central Bank and Bank of England to the post-Brexit challenges); the weaknesses in European banks, which could drive the next euro crisis; political risks (but not only the U.S. presidential election, but also presidential and general elections in France, Germany and the Netherlands, and a referendum in Italy); and the negative yields on many traditional safe assets such as governments bonds.

What is, however, the most valuable in Robinson’s analysis is noticing not only the opportunities in the sensitivity of gold to developments in the global economy, but also the challenges associated with this feature. For example, he argues that the outlook for gold faces substantial risks, as “investors that piled into gold to protect themselves from negative yields may have a shock when yields and interest rates eventually rise and they find they are holding large amounts of non-yielding assets at a time of rising costs”. Moreover, the author points out that since gold lacks yield, it is not a long-term solution for pension funds and insurance companies suffering in the environment of low interest rates. Last but not least, Robinson notes that the increased role of gold as a safe haven may make gold prices more volatile and more sensitive to monetary policy announcements.

The key takeaway is that the London Bullion Market Association published the latest issue of Alchemist in October. The most interesting piece focuses on gold’s role as a safe-haven asset. Investors should remember that it creates both opportunities and challenges for the precious metals market.