Britain has sailed past China as the biggest single purchaser of Australian gold. Through the first nine months of the year, the UK has purchased $9 billion of gold compared to China’s $5.8 billion.
London is the world’s gold trading capital, with the Bank of England (BoE) holding 400,000 bars of the precious metal worth more than $200 billion. The Reserve Bank of Australia’s (RBA) 80-tonne gold holding is stored with the BoE. The RBA confirmed it had not sold any of its holdings.
It is understood almost none of the gold is being physically moved from Australia to Britain. Investors buy and sell gold without it actually leaving the bank’s network of vaults, partly because there is a risk of losing small amounts in transport.
Professor of finance at the University of Western Australia, Dirk Baur, said British investors’ surge of interest in Australian gold was not surprising given the economic challenges facing the UK.
Professor Baur, an expert on the financial economics of gold, said there might be a short-term safe-haven protection for investors by diversifying their holdings into the precious metal given the uncertainties surrounding Brexit. Investors were also seeking to protect themselves in the case of a fall in the pound if the British economy slowed as key elements of Brexit, such as tariffs or increased bureaucracy, kicked in.
“It works as a currency hedge and as a safe haven,” he said. “When you expect your currency may go down, then it makes sense to have something that is resistant to currency change. If all hell breaks loose in the wake of the election result [on December 12] or something happens during Brexit, then these people have double protection.”
Professor Baur said there had been increases in gold purchases during previous tumultuous events such as the September 11, 2001, terrorist attacks in the United States and the global financial crisis.
The previous record for British quarterly purchases of Australian gold was in the first three months of 2009, when the UK economy slumped into recession and concerns rose of a global depression. The purchases in the September quarter this year are 36 per cent higher than in 2009.
The surge in demand for Australian gold is contributing to the nation’s strong export performance. While most focus has been on demand for iron ore and liquefied natural gas, which contributed to this week’s 0.4 per cent lift in gross domestic product, the gold sector is also playing a part.
Australia exported $19.6 billion of gold between January and September. It has already eclipsed the $19.1 billion exported through all of 2018.
CommSec chief equities economist Craig James said concerns about the global economy were actually helping the Australian economy through demand for gold. He said a relatively low Australian dollar and a lift in the gold price over the past year, due to global economic worries, were working in Australia’s favour.
“For Australia, this is very much a big win. You’ve got the concerns over Hong Kong, the ongoing China-US trade dispute, and the British election and Brexit, so that is all giving Australia a lift,” he said.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.