• Friday, March 29, 2024
businessday logo

BusinessDay

Gold offers safe haven as oil demand, yield on fixed income collapse

Gold offers safe haven as oil demand, yield on fixed income collapse

Falling oil prices as a fallout of shrinking demand, low-interest rates on fixed income instruments, and accelerating inflation are some of the fundamentals making gold a safer haven in the medium to long-term.

Some early signs of this that the so-called gold-backed exchange-traded funds () such as the “New Gold ETF,” which is managed by the investment arm of South African bank, ABSA Group, and listed in South Africa and Nigeria, has surged 96 percent.

Data from the Securities and Exchange Commission (SEC) show that the net asset value, a gauge of investors’ appetite, of the New Gold ETF in Nigeria, is up 24-fold to N19 billion as of August 14 from N769 million at the start of the year.

According to Lukman Otunuga, senior research analyst at FXTM, a forex investment platform, gold offers Nigeria support in the medium to long term.

Already, the Central Bank of Nigeria has purchased Nigeria’s first own refined gold and started creating a new gold reserve. The CBN paid N268 million for the 12.50-kilogram gold bar in July.

“This is an opportunity for Nigeria to diversify away from oil. Oil is seen as a safe haven destination because it tends to perform well in periods of uncertainty,” Otunuga said during a virtual session with journalists to review Nigeria’s economic performance in 2020 and project outlooks for the economy.

Otunuga affirmed that current gold fundamentals present the commodity as a safer asset class to invest in a low-interest rates environment. Gold is a zero-yielding asset and tends to perform well in a low-interest-rate environment. It is also a hedge against inflation.

Read also: Local companies see better cash flow as oil rallies towards $90 a barrel

A Joe Biden presidency is projected to inject fiscal packages in the United States of America’s economy. More dollars would be pumped into the economy to provide help to households and businesses. This will bring about inflationary pressures. Fiscal packages are also expected across many other economies to reflate economic growth and offset the economic fallouts from Covid-19. In this context, gold offers a safe haven in the medium a long term.

In Nigeria for instance, the New Gold ETF, which is like investing in gold but electronically, rose 8.10 percent in August to close at N9,980, according to Bloomberg data, having hit a peak of N10,000 on July 28.

Investors are piling into the asset class in search of inflation-beating returns and as a way to hedge against economic uncertainty.

Gold ETFs globally are riding high on the COVID-19-induced economic decline, lower interest rates, and a struggling US dollar that have sparked a rush to invest in safe-haven assets like gold.

The outlook for Gold prices would, however, determine how long the rally in gold-backed ETFs can last.

For the rest of 2020 and early 2021 “we should pay close attention to what the Central Bank of Nigeria does, where oil prices trade, how the Federal Government executes the 2021 budget, the political developments in the USA, and dollar valuations,” Otunuga said. Nigeria’s economy is projected to expand by 1.70 percent in 2021.

Nevertheless, diversifying Nigeria’s economy away from oil and investing heavily in infrastructural development remain key to protecting Nigeria’s economy against external shocks such as oil prices. A diversified economic production base that includes agriculture and other non-oil sectors would also help eradicate poverty by boosting domestic production, which feeds back into gross domestic product growth.