ram Shishmanian is Chief Executive Officer of the World Gold Council, a role he has held since January 2009. Aram has over 30 years experience as a management consultant, including 27 years at Accenture, where he held a number of leadership roles, including Global Managing Partner of the financial markets industry practice, before becoming a senior partner. Subsequently, he was appointed as a Non-Executive Director of Resolution plc, the Senior Non-Executive Director of Victoria plc, a Non-Executive Director of a Swiss based asset-management company and several other companies. Aram was also previously an independent member of the International Executive of Hogan Lovells LLP.
Aram, thank you for your time. Can you give us an overview of the work of the World Gold Council?
The World Gold Council is the market development organisation for the gold industry. Our purpose is to stimulate and sustain demand for gold, provide industry leadership, and be the global authority on the gold market. The World Gold Council has been a key player in many of the initiatives that have driven change in the gold market over the past two decades, such as the liberalisation of the gold market in China and the rapid rise of demand in the East. We have also increased recognition of gold as a financial asset across a wide spectrum of market segments, supported by physically-backed gold product innovations.
Based in the UK, with operations in India, China, Singapore and the US, the World Gold Council’s members constitute the world’s largest and most forward-thinking gold mining companies.
What are the gold trends you expect in 2019? What is the long-term picture for the gold market?
We expect that the key factors that drove gold in the second half of 2018 will continue to hold sway over the market in 2019. Physical buying in China and India should be solid, bolstered by good growth in both economies, which together make up half of consumer demand for gold. Technology demand, which has grown steadily over the last eight quarters, should continue to perform well as the world becomes increasingly digitally connected. Central banks, whose collective buying was one of the standouts of 2018, are widely expected to continue to buy gold into 2019 and it’s possible additional central banks will join the trend.
If US stocks recover from their current bout of weakness, and if the economy continues to out-perform the other major economies, the dollar may remain strong and gold may struggle to push significantly higher. But if US growth slows, or if trade wars or tighter monetary policy create further drag, then investors may continue to seek gold. Furthermore, if the economic slowdown is rapid or if risk assets fall sharply, investment flows into gold could match those seen during the 2008-2009 financial crisis.
We believe now is a very good time to consider the role of gold in a portfolio. As a high quality, liquid asset, with the potential to deliver strong returns, and as an effective diversifier that works particularly well when other assets fall sharply, gold has been historically proven to enhance the long-term performance of investment portfolios.
Looking at the different regional gold markets, can you give insight into:
Europe continues to be a major source of demand for gold and London continues to be the centre of the over-the-counter global gold market, and home to one of the largest stockpiles of gold in the world.
Consumer demand for gold in Europe in Q3 2018 was up eight per cent year-on-year. While economic sluggishness in regions such as France and Italy, as well as Brexit uncertainty in the UK, have remained a drag on jewellery demand over recent quarters, concerns around Italian debt and its potential to spark a broader financial crisis prompted safe-haven buying among retail investors across the region during Q3.
Germany’s gold investment market has boomed in the past decade, with investors turning to gold to protect their wealth in the face of successive financial crises and loose monetary policy. In Q3 2018, Germany, which accounts for more than half of the region’s bar and coin investment, was up 10 per cent. European ETFs grew 10 per cent over the year. For a second straight year Germany led country inflows, adding US$2.6bn. UK-based funds followed and had inflows of $1.7bn. Russia and Turkey continue to dominate in terms of central bank net purchases, however, there has also been a recent trend for other European central banks to start buying gold. The National Bank of Poland bought gold every month in Q3, while in October, Hungary announced that it had increased gold reservesten-fold from 3 tonnes to 32 tonnes, its highest level since 1990.
China is the world’s largest and fastest-growing gold market, accounting for 23 per cent of total demand and 13 per cent of total supply. Driven by an increasingly affluent society that is steeped in tradition, demand for gold jewellery and technology remains robust as a result of continued innovation by retailers.
In Q3 2018, China saw bar and coin demand hit a five-and-a-half year high, increasing by 25 per cent year-on-year. Jewellery demand also continued to rise, totalling 174 tonnes in Q3, a 10 per cent increase year-on-year, partly due to a flurry of buying around the Qixi festival.
In our October issue of Gold Investor, we explored the enormous potential for future growth in the Chinese gold market, which will involve liberalisation, improved regulation and internationalisation. We believe that if addressed, these factors will ensure China stays at the forefront of the global gold industry.
c. Middle East
Gold has been an integral part of Islamic culture for centuries, prized for its value as a currency and recognised as a store of wealth. The launch of the AAOIFI Shari’ah Standard on Gold in 2016 removed uncertainty around gold’s Shari’ah compliance.
d. North America
North America is home to the largest and most liquid gold-backed ETFs but it has seen a recent decline in demand. Funds listed here led global outflows in 2018, largely driven by the weak performance of gold during the third quarter; these flows reversed sharply in the fourth quarter when global stock markets tumbled.
US jewellery demand for gold in the United States remains positive. By the end of Q3 gold jewellery demand in the United States was at its highest year-to-date level since 2009, supported by a buoyant economy and yellow gold becoming increasingly fashionable.
India is one of the largest markets for gold. Gold has a central role in the country’s culture, considered a store of value, a symbol of wealth and status and a fundamental part of many religious occasions.
The market is continuing to evolve and grow to meet consumer demand and has recently been subject to significant policy changes which include trying to move India’s informal cash economy towards greater transparency and into the digital age. These have included; the introduction of the pan- India Goods and Services Tax (GST), which is helping to enable greater transparency in the industry; the launch of the Gold Monetisation Scheme, the recent publication of the Niti Aayog report on ‘Transforming India’s Gold Industry’; and the discussions around introducing mandatory hallmarking nationwide.
How do you see the US-China trade war? Despite it being a geopolitical and technological competition, what has been / will be the impact on gold and currencies?
Geopolitical tension and uncertainty, such as global trade wars, or simply rhetoric, often cause fluctuations in financial markets. While we do not make predictions on the gold price, and forecasting market turmoil is very difficult, we can speak to the impact of geopolitical tensions on gold more generally.
Gold acts as a diversifier and a financial asset that mitigates portfolio losses in times of market stress, hence heightened global trade tensions give increased incentives for investors to turn to gold as a safe haven asset.
During this time of global trade tension, what has been the advice of the World Gold Council to central banks and sovereign wealth funds?
The World Gold Council doesn’t give investment advice, but lately we have seen a significant acceleration in central bank buying, with more and more central banks increasing their allocations to gold. This reflects a combination of factors, including the desire to hedge against heightened geo-political and economic risks. Gold’s characteristics, including its lack of credit and political risk, mean that it can play a unique stabilising role in such circumstances. More generally, it is a highly effective diversifier against the assets typically held by both central banks and sovereign wealth funds.
For individual investors, what is the optimal level of investment in gold? Can you expand on why that level is appropriate?
As above, we don’t offer investment advice, but our analysis shows that a modest allocation to gold, between two per cent and 10 per cent, can increase risk-adjusted returns. Gold’s unique characteristics as a portfolio diversifier, acting as a hedge against inflation and an effective balance against currency risk, mean it often delivers a return when other assets falter.
Is improved access to banking and smartphone enabled digital financial services seen as a threat to gold’s traditional role as a major store of wealth across Asia?
Physical gold ownership is deeply entrenched in Asian customs and traditions, particularly in India and China, the two largest markets for gold globally. Demand here is robust, and we do not foresee this altering in the short-term. However, as is to be expected in the current digital climate, digital payment companies and smartphone enabled digital financial services have proven particularly popular for young investors who have the appetite to invest in gold. We see this as a positive development in terms of ensuring that gold investment options are reaching a wider set of consumers than ever before and the new technologies are being embraced by the industry, with new gold-backed products being developed.
Concluding a decade as CEO of the World Gold Council, what have been the differences or surprises that you found when investing in gold between then and now?
Institutional investors: A decade ago the majority of institutional investors did not consider gold. The financial crisis of 2009 and the increasing geo-political and macro-economic uncertainties we now face have changed that. Today, pension funds are beginning to make allocations to gold as it is increasingly viewed as a highly credible portfolio diversification tool and a way of preserving the underlying value of a portfolio. And while the overarching institutional market currently remains underinvested in gold, this trend is likely to accelerate significantly over the coming decade.
The growth of China: The investment market in China has grown significantly, driven by demographics, but also active encouragement by the PBOC and regulators, as well as the building of world class infrastructure such as the Shanghai Gold Exchange. All these have contributed to making gold investment ubiquitous, efficient and effective. This will enable the continued growth of the Chinese market.
ETFs: ETFs in North America and Europe have become a highly effective and cost efficient means of investing. As such, in the US, the ETF market is the proxy for gold demand. Worldwide, assets held in ETFs are currently in the region of approx. $100bn.
Digital investment: Mobile app driven investment platforms have rapidly emerged over the past decade. In India, China and SE Asia there are platforms that with a few clicks allow you to make small investments which are fully backed by gold. Western markets lag such tech enabled innovations. Disruptive business models enabled by technology were not on the agenda a decade ago. Today there are many initiatives that are looking to break down industry barriers and redefine the value chain of the industry, thereby accelerating gold becoming a mainstream financial asset; by increasing transparency, the ease of buying and reducing the cost of ownership.
Transparency and data: The opaqueness and lack of transparency of the gold industry has improved. The OTC market now reports transaction flows through the activities of the LBMA, and our recently launched Goldhub site provides the definitive source of gold data and insight, enabling investors to make informed decisions.
ESG: Responsible gold mining practices are increasingly being demanded by regulators, corporations who use gold in their products, and investors who require the provenance of their assets to demonstrate robust environmental, social and governance (ESG) credentials. Furthermore, civil society is also making these same demands. Accordingly, it is extremely important that we work with our members, the leading gold mining companies worldwide, to address these needs. We have developed standards and guidance notes to address ESG requirements, such as our Conflict- free Gold Standard. We are now working with members to develop Responsible Gold Mining Principles aimed at creating a credible and widely recognised framework to address key ESG issues across the gold mining sector.