The first quarter of this year saw a shift in money flows from sovereign funds, with most opting for gold instead of stocks as before, leading to the lowest holding rate of shares since 2014.
|Sovereign funds will keep investing in gold |
Since early this year, the price of gold went up by 25 per cent to $1,980.57 per ounce, breaking the $1,921 record in 2011. In addition, the global securities market is also on the rise, as reflected by the recovery of the MSCI World Index which needs only 5 per cent to catch up with February levels.
Over the first quarter, sovereign funds dropped stock holdings to a six-year low, according to Invesco’s survey on 83 funds and 56 central banks across the world, with the total assets valued at $19 trillion. The US-based investment management company supposed that concerns of halting growth are the main reason behind the sharp downturn in stock demand.
This sell-down of stock holdings shows no signs of ending. More than one-third of the funds plan to reduce stock holdings in the next year, about 18 per cent of which intend to reduce holdings by 5 per cent at least. Private-equity funds and infrastructure funds are poised to be the beneficiaries of the investment flows, according to Invesco.
In contrast with the gloomy prospects of stocks, investment in gold has been steadily growing as the precious metal is commonly seen as the safe alternative during financial hazards when inflation skyrockets due to looser monetary policies.
In recent years, central banks across the globe have enhanced gold reserves. Accordingly, 18 per cent revealed plans of continuing to buy gold within the next year and 23 per cent of funds have similar intentions, according to Invesco.
Sovereign funds see gold as protection from inflation as it is only loosely tied to other financial assets. They usually purchase gold via ETFs, futures contracts, or gold-exchange contracts.
Meanwhile, for central banks, gold is a kind of alternative asset to bonds and USD. Currently, central banks are holding $14 trillion in bonds. According to Citigroup, the price of gold has been constantly breaking records, which could sooner-or-later raise problems. Gold investors are forecast to have a good time, while stock investors will see stocks dropping.