Perspectives 2020-2021 Public Sector

Citi Perspectives for the Public Sector 44 45 Leveraging the New Gold Rush: How to Extract Greater Value from Gold 44 Leveraging the New Gold Rush: How to Extract Greater Value from Gold G old has proved a defensive and stabilizing influence on portfolios during COVID-19, capping a decade during which it has enjoyed a renaissance as a strategic asset for the official sector, propelled by growing central bank demand. By utilizing new financial tools, the official sector can gain even greater benefits from its holdings. Gold has become a key strategic asset during the COVID-19 pandemic. It has long been viewed as a safe haven, acting as a store of value for investors when other investments are volatile. It can also be used as a hedge against falls in stocks, currencies and bonds while providing diversification and, potentially, higher risk-adjusted returns. Given today’s uncertain macro climate, gold’s value proposition is widely recognized. The spot gold price has broken through the $2000/oz barrier reaching all-time highs, overtaking its previous record of $1,920 achieved in September 2011. Gold market bull cycles tend to endure for years, not quarters, and with the backdrop of unprecedented central bank stimulus, the gold price can be expected to remain higher for longer. In the post-Bretton Woods/Nixon currency shock era, three gold market bull runs stand-out: 1971-1980; 2001-2007; and 2009-2012, during which real and nominal gold market annual returns averaged 17% and 21% respectively. Current gold markets appear to be in the middle of a similar secular bull cycle; a new record USD gold price may be within reach. 1 Central bank buying slows but trend persists In recent years, central banks (CBs) have become net buyers of gold. This contrasts with 2008/2009 and the preceding decade where they were net sellers, with an average sales volume of 400 tonnes per year, CBs represented an important part of the global gold supply, now they are an important driver on the physical demand side of the equation. More recently this trend has slowed with some CBs even selling gold holdings. Crucially, despite the slowdown in purchases, the clear trend in recent years remains one of net buying. Global CB gold holdings of around 35,000t (an impressive 10 times the size of gold ETF holdings and a decade worth of gold production) are still expanding, with gross purchases exceeding bullion sales. 2 Gold has become a key strategic asset during the COVID-19 pandemic. It has long been viewed as a safe haven, acting as a store of value for investors when other investments are volatile. 1 Citi Research: Global Commodities Quarterly, 4Q 2020 Outlook. 2 Citi Research: Going for GOLD, https://www.citivelocity.com/t/r/eppublic/1ty33 Akeel Akhtar EMEA Public Sector Group, Citi Giovanni Laureri Global Head of Bank Solutions, Citi Commodities Narjess Aschi EMEA Public Sector Group, Citi Burak Ciceksever Head of Investor Sales, Central Eastern Europe, Middle East and Africa, Citi