Rush for gold to continue as hedging strategy amid COVID-19

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By Anna J. Park

Amid excessive liquidity in the global market due to major countries’ monetary easing policies, the rush for gold as a safe haven asset is expected to continue during the second half of the year.

According to the Korea Exchange (KRX) gold market, the price for one gram of gold rose to 69,170 won ($57.86) Wednesday, another 0.58 percent up from the previous trading session. This is a 29.6 percent increase year-on-year, when the price stood at 53,370 a year ago. This year alone, the precious metal’s price soared by 22.1 percent, since the price started at 56,620 won at the start of this year.

Retail investors flocked into the gold market, with an average trade volume of 90 kilograms per day during the first half of 2020 ― up 106.5 percent from last year.

“Since January this year, the market has been very brisk; the average trade volume has shown continual growth. But the rate of increase in trading volume slowed somewhat from June, as the gold price rose quite a lot recently compared to the start of the year,” an official from the KRX gold market explained, saying that the volume of trading has been stunted for a while due to the much higher price.

The official also pointed out that various benefits of the KRX gold market ― including tax benefits, lower transactional costs than gold-related derivative products and a reasonable gold price ― continue to attract investors to the market. The KRX gold market’s gold price stays within a 100.1 to 100.4 percent range of the global standard price, with a minimal level of transactional costs.

Gold price to increase over long-term period

Market experts say the price of gold is bound to continue its upward trend, despite short-term corrections, given the abundant liquidity in the global market. The trading volume of the metal is also expected to increase amid ongoing concerns about the coronavirus-led market volatility.

“Among traditional safe assets like bonds or silver, gold has shown the best performance this year. As now is the time when global liquidity is radically increasing, each currency’s valuation is compelled to drop. Thus, gold’s relative value will continue to rise over the long term,” Park Kwang-rae, an analyst at Shinhan Financial Investment, told The Korea Times.

“Investors are advised to buy the precious metal as a hedging strategy to diversify their portfolio in preparation for market uncertainty, instead of putting all their assets into one basket,” the analyst explained, adding that about five percent of total assets is deemed appropriate for gold investment.

The analyst further stressed that the metal’s price doesn’t usually fall drastically, yet it often gets lowered by 2 percent to 3 percent a day when economic indices turn out to be better than expected. That’s because on such occasions, investors prefer riskier assets such as stocks. The analyst said that’s when investors are advised to buy the precious metal.

Gold-related derivative products attract investors

Currently, there are a few gold-related derivative products in Korea, including the KODEX Gold Futures ETF, Tiger Gold & Silver Futures ETF, KINDEX Gold Futures Leverage ETF and Samsung-KRX Gold exchange-traded note (ETN). The KINDEX Gold Futures Leverage ETF recorded a monthly profit rate of 17.6 percent last month, and other ETFs also logged a near 10 percent profit return over the past month.

Despite such stellar performance of gold, it’s not all that often that a gold-related derivative product is introduced in the local market. A market insider told The Korea Times that this was because most gold-based ETFs track gold futures prices, which bear the risk of having separated prices from real gold prices, and this uncertainty looms large, particularly in times of volatile market conditions.

The case is similar in global gold ETFs. Kim Soo-jung, ETF strategist, at SK Securities explained that ETFs on raw materials like gold and other metals are not like other derivative products tracking fast-changing technologies or business sectors, as gold-related ETFs have a pretty traditional structural form in their composition.

Instead of having new derivative products often, gold ETFs have seen much liquidity flowing into already-existent gold-based mutual fund products lately.

“Data from June shows that the amount of gold owned by ETFs has reached an all-time high since 2004,” the analyst said, adding that gold ETFs have witnessed the largest amount of capital inflow on a global scale lately, followed by corporate bonds.

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