Azernews.Az

By Gulgiz Dadashova

“Gold is money. Everything else is credit.” J.P. Morgan, testifying to Congress in 1912.

The gold buyers, who had dilemma over the precious metal earlier, now reacting positively to this quote, as the situation in the global crude market worsens.

Gold rose in December for the first time in four months as signs of slowing economic growth has spurred haven demand.

Gold purchases increased in January amid the fact that the crude continues to tumble. Bullion is off to its best start to a year since 1980 while oil is trading near the lowest since the 2008/2009 global financial crisis.

Gold futures climbed 9.9 percent in January to $1,301.40 an ounce as of 12:29 p.m. on the Comex in New York, heading for the biggest monthly gain in three years. The metal rose 9.1 percent this year.

Bullion for immediate delivery lost as much as 0.3 percent to $1,288.65 an ounce and was at $1,290.71 by 2:47 p.m. in Singapore, according to Bloomberg generic pricing.

Meanwhile, oil’s slump is set to extend the biggest drop amid estimates that U.S. crude inventories increased to their highest level since 1982. Crude oil prices are reaching new lows each day after Saudi Arabia reiterated its stand not to cut production.

Saudi Arabia, the world’s biggest oil exporter, will maintain its current policy, refusing to pare output and bolster prices alone, even as prices fall to levels “too low for everybody,” Saudi Aramco’s Al-Falih said at a conference in Riyadh.

“Supply and demand and the rules of economics will govern. It will take time for the current glut to be removed,” Al-Falih said. “Saudi Arabia will not single-handedly balance the market in a downturn,” he said.

The oil prices recorded almost 50 percent drop last year as the U.S. pumped at the fastest pace in more than three decades while the OPEC turned down calls to cut supply. Lower demand from China, India and the EU, as well as the global supply glut is among contributors to the price decline.

Brent, a global benchmark, traded at $48.97 a barrel on January 29 compared with a high of $115.71 in June amid a global glut.

The price of WTI crude oil, the US benchmark, hovers at $45 a barrel. It has lost 58 percent since June 2014.

Cheaper oil means lower inflation, and under these circumstances gold should be affected negatively since it’s usually considered a hedge against inflation.

However, falling oil prices are not an enemy to gold any more, experts argue.

“People need a flight to quality as there is so much uncertainty in Europe, and at the moment, gold looks like one of the safest assets,” Donald Selkin, chief market strategist at National Securities Corp. in New York, told Bloomberg.

Gold seems to be among the safest asset

The falling oil prices force gold buyers to seek a hedge against prolonged declines in consumer prices. Investors also intend to brace for currency volatility as policy makers in Europe and Asia look for new ways to revive growth, as the International Monetary Fund and the World Bank cut outlooks for global growth this month.

European Central Bank President Mario Draghi announced plans for 1.1 trillion euros ($1.3 trillion) of asset purchases. Japan’s central bank cut its inflation forecast and kept its unprecedented monetary easing unchanged this week. Bullion priced in euros jumped 25 percent in the past 12 months, and 19 percent in yen. The metal rose 5.1 percent in dollar terms, Bloomberg reports.

Meanwhile, Russia increased its gold holdings for a ninth month. Russia held 38.8 million ounces last month, the most in at least two decades, the International Monetary Fund data show.

Central banks globally are adding gold to reserves after reducing holdings for about two decades from the late 1980s as they seek to diversify assets, according to Oversea-Chinese Banking Corp. Worldwide purchases would probably be 400 tons to 500 tons in 2014, the World Gold Council said in late 2014.

Russia has more than tripled its holdings since 2005 even as it used its international reserves to defend the ruble, which decreased almost 50 percent in the past 12 months.

Domestic market

The fact that gold is rapidly beginning to rise in price against the background of falling oil prices is no surprise. This fact also affected the domestic gold market, as the gold remains a "lovely" metal in Azerbaijan.

Despite the difficult times, one can always see people who want to replenish their stocks of jewelry in the jewelry department. Well, we like gold, and there's nothing one can do about it.

Expert Samir Aliyev said of course, the cost of this metal has risen in the domestic market given the rising tendency in the world.

He said the oil prices fell as much as 2.5 times in summer, which is quite a significant number. “That is why people seek to protect savings and resort to gold,” he told local media

The gold prices in the domestic market rose in mid 2014, then fell, and it is increasing again since early 2015. "However, the price of gold has not particularly increased due to the relatively stable exchange rate of the USD,” Aliyev said.

The economist considers gold the most reliable long-term asset, saying that it has always been the one.

“So, during the global financial crisis in 2008/2009, the price of gold rose by 20 percent. In many developed countries, for example, in Germany, the U.S. share of gold in the foreign exchange reserves of the country is 50 percent. As for Azerbaijan, the figure is about 5 percent. Analysts suggested the country to buy gold in 2009, but the decision was made later.

However, the fact that Azerbaijan now purchases gold is the right decision. In the future, actually the proportion of gold in foreign reserves can be brought to 20 percent, but it should be made when the price of oil will stabilize,” he told local media.

Aliyev also added that people rarely buy gold bullion in Azerbaijan, as it may be relevant only for storage in the bank as a deposit.

“The purchase of bullion is not common here, people prefer to put money in the bank, instead of gold,” he said noting that people prefer to save the gold as jewelry.

Goldsmith Yusif Ahmadzade also notes high demand in gold in the domestic market, saying that number of workshops rise in Baku.

“Masters teach students the basics of the jeweler profession, and after a couple of months they began to show themselves,” he said. “But demand remains high, and if there is demand, there will be supply.”

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