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[00:00:09]

It's the 12th of August, and you're listening to Kopi Time, a podcast series on markets and economies from diverse group research. I am chief economist. Welcome to our twenty fifth episode, which is a silver anniversary. But we will talk about a different medal today. Gold and to talk about that precious metal, the price of which has rallied by about 25 percent over the past year. We have with us today Shawki Phan, head of Central Bank Relationships World Gold Council.

[00:00:40]

He has been with the council for about five years. Shuko fan, welcome to Capitate. Thank you for having me. It's a pleasure to be here. Great to hear your voice and to have you on the show showcase. You represent World Gold Council, which as of its website, is the market development organization for the gold industry. And the purpose is to stimulate and sustain demand for gold, provide industry leadership and to be the global authority on the gold market.

[00:01:08]

Now, in this show, we're not doing this to stimulate or sustain the demand for gold, but we are very keen to hear about gold from an industry leader. And we do want to know what's happening at the gold market. So I'd like you to indulge us a bit. If you could first talk about the supply side and give us a sense of how much gold is typically produced in a year, who produces them and how that gets moved around.

[00:01:33]

Sure. Thank you very much. First of all, very concise introduction about what we do at the World Gold Council. We are the industry market development organization for gold. We have a general purpose to enhance and improve the gold market. And in my specific role, I actually do a lot with governments and central banks around the world giving them information about gold, advising them. So I'm always happy to talk more about gold in general. Your first question is about supply, and I think that's a very great way to start the topic.

[00:02:03]

I think it'll be useful to start off with with a visualization exercise. The best estimate for the total amount of gold ever mined is about one hundred and ninety seven thousand tonnes, which sounds like an abstract number. But if you were to stack this gold neatly, you'd form a cube that's only about twenty one meters cubed. So twenty one meters by twenty one by twenty one. And the volume is just the same as three Olympic size swimming pools. So that's, that's it.

[00:02:28]

That's all. The gold that's ever been mined in human history can fit into three Olympic size swimming pools with regard to new supply. On average, about three thousand to three thousand five hundred tons of gold comes from new mine production every year. And another one thousand to, let's say, sixteen hundred tons comes from recycled gold and re-entering the supply chain every year. So that makes total annual supply about four thousand tonnes, give or take every year. It does vary year on year.

[00:02:56]

Gold comes from quite a diverse set of geographic sources. The largest gold producing country right now is China, which produced just about 11 percent of total production last year. Russia, Australia, the US, Canada. They rounded out the top five remaining producing countries. But overall, gold production is spread out very evenly across all the different continents, somewhat less in Europe. Here in Southeast Asia, Indonesia and the Philippines are the most significant producers. And you asked about what is the production process?

[00:03:26]

How does it moved around so newly mined gold or is shipped from the production site to refineries around the world? And at these refineries, gold is refined to various different forms and standards. Probably the most well known standard is the London Good Delivery Standard, which, as the name suggests, is the standard required for gold entering the London market. Here in Asia, though, we typically see kilo bars more often, as the name suggests, for kilo bars, it's one kilo in weight.

[00:03:53]

So it's about sixty four thousand US dollars in today's value versus about seven hundred to nine hundred thousand dollars for the good delivery bars, which are much, much bigger. So in Asia, because the retail market is quite strong for gold in Asia, we typically see kilo bars more often. In London, it's those large bars that are more often more commonly traded. And since gold is traded across many different financial centres around the world, it can be settled in different markets.

[00:04:18]

London continues to be the most important terminal market for gold. It's also the home of the Bank of England, which operates a vault that contains many of the official gold reserves of central banks around the world. But since we're here in Singapore, I do have to stress the gold market is continuing to grow in importance here. Many of the major bullion banks have gold trading desks in Singapore. There's some excellent storage facilities in the city and we even have a refinery here.

[00:04:41]

So with Singapore's position as the leading financial hub for Southeast Asia, I'm hopeful that gold will grow in importance for Singapore's financial sector as well.

[00:04:50]

There is a refinery in Singapore. Wow. OK, there is. Yes, that's a great nugget of information. I really don't think most of our listeners would be aware of that. OK, so stick with this production part of gold for a little longer, if you may. Is it very costly to produce gold in gold miners? I mean, how are they doing in terms of, you know, technology and resource intensity of production? It is, generally speaking, quite expensive to produce gold.

[00:05:22]

The gold production costs can vary greatly, though, due to many different factors, such as the technical requirements of the mine site, for instance, or local labor costs. Many of the older mines are already very, very deep. And the deeper you go, the higher the extraction costs become. And also, please recall that it takes years of research and exploration and planning to decide on mine sites before the first. Ounce of gold is ever extracted, so the exploration costs have to be factored in as well.

[00:05:51]

The World Gold Council has done a lot of work in this area. Our member companies are mining companies. So together with these mining companies, we developed guidance on all in costs for gold production that conform with gap accounting principles. And this helps to provide more transparency and consistency in looking at how different mining companies report their costs. The current all in sustaining cost for gold production is about one thousand US dollars per ounce. And that information is publicly available on our website, including a data series that looks into the past.

[00:06:21]

The gold mining companies know they're doing OK. I think, you know, the gold price has been pretty high recently, but of course, every company has its own specific factors going into it. So I can't speak for all of them uniformly. Sure, sure. But again, thanks for that. OK, move to the demand side. So this year has been characterized by a pandemic and economic crisis, financial market volatility. And as I said at the beginning of this podcast, gold, of course, has had a quite a bit of run up.

[00:06:52]

So from your vantage point, what kind of investor behaviour are you observing? And I'd like you to take some time with this question so maybe you can touch on how it looks from the perspective of individual investors, institutional investors. And since your job on a day to day basis, look at the central bank. So tell us about central bank behaviour and also gold traders. Absolutely. I completely agree with you. If I had to describe this year so far in one word, that word would probably be unpredictable.

[00:07:23]

It's been just an incredibly volatile year and there may be many structural changes in our economies, the markets, our lifestyles, even. That will be the lasting legacy of this pandemic. And you've already said gold has done quite well this year. It's up about 30 percent year to date. I'm sure your listeners have seen some of the recent headlines about gold surpassing its previous all time high, went over two thousand dollars an ounce last week. And I think that gold's strong performance this year can be linked to several different factors.

[00:07:52]

The first is just general worry and uncertainty about the state of the world and the future direction of markets. But then beyond that, there's also the continued compression of yields globally due to massive central bank easing, which is a response to the pandemic. And then linked to that is the potential for inflation, both from the monetary stimulus from central banks, but also the fiscal stimulus that a lot of governments are pursuing around the world. So you asked about how gold is being seen by different investors.

[00:08:20]

So let's let's start with institutional investors. And this is a group that's actually been making some pretty notable progress in embracing gold as part of their portfolios recently. This investor segment as a whole has been largely underweight gold for quite some time. I think Bank of America may have said that global investor allocations to gold today are about half of what they were in 1980 in terms of Gold's proportion in the portfolio. But if I'm a portfolio manager today at an institutional investor and I'm trying to assess the long term impact of covid, I'd probably focus in on a couple of major potential structural shifts.

[00:08:55]

The first shift is that yields will be just low and negative for a prolonged period, and that makes fixed income relatively less attractive and gold relatively more attractive. Gold, generally speaking, performs very well when yields are low because the opportunity cost for holding that gold goes to goes down. Gold produces no cash flow, of course, so therefore when yields are low, gold, relatively speaking, is less costly to hold. The second major potential structural shift that I'd be seeing is this prolonged monetary easing and combined with fiscal stimulus and also just the global contraction in aggregate demand caused by the pandemic altogether, these factors might spark inflation.

[00:09:36]

And we've actually seen some indicators of inflation tick up recently. If I were a portfolio manager, I'd have to think about that as well. And gold, historically speaking, has performed very well during periods of high inflation and also stagflation. To the third factor I think about is just the markets are very choppy right now. There's a lot of volatility out there. And that volatility isn't just financial volatility. It's also increasing volatility on things like geopolitics as well, the not least of which is the worsening relationship between the US and China.

[00:10:08]

Gold is traditionally a safe haven aspect. It's done well during periods of acute systemic risk and has very little correlation to other risk assets. So if I'm looking for an asset that can help manage risks, gold can be a solution for that problem as well. All of these factors are generally supportive of gold, which is maybe a reason that many institutional investors have publicly announced new allocations to gold in recent months. And it's also reflected in the massive inflows we've been seeing into gold backed ETFs, which are a very common way for institutional investors to access gold.

[00:10:41]

Now, I've spent a lot of time on institutional investors. I don't want to neglect the other parts of your. Another major class of gold investors is, of course, central banks, which is the segment that I interact with the most personally, central banks hold gold as part of their official reserve assets, which are used to help maintain the value of the currency, lose confidence in the economy, et cetera. Gold forms a major part of global reserve assets.

[00:11:05]

It's about 13 percent of total reserve assets around the world, which actually makes it the third most widely held reserve denomination after the US dollar and the euro. Central banks have been net buyers of gold for over a decade now. In fact, twenty, eighteen and twenty nineteen were the highest and second highest years for central bank gold buying respectively since the end of the Bretton Woods system in the 1970s. This year, twenty twenty central banks have continued to be net gold buyers.

[00:11:33]

They added about two hundred and thirty tons of gold in the first half of the year. That's down compared to last year's record high numbers, but actually it's roughly average compared to the last 10 years. And I think the pandemic has forced central banks to focus on insuring stability of their currencies, their economies, their financial systems. And gold has performed well in doing that compared to other reserve assets. Gold has actually done quite well. So it's fulfilling its role as a strategic asset that is liquid during times of need.

[00:12:03]

And we expect central banks to continue to be net gold buyers this year. I think finally, that brings us to individual investors. The factors that I talked about earlier. I think they're also relevant for individual investors as well who are deciding on their portfolios. And there are a variety of ways that they can gain access to gold, whether it's physical gold or gold, ETFs or whatnot. And I know that here in Singapore, many Singaporeans can actually hold gold, a gold allocation in their CPF portfolios to ultimately, though, of course, the decision to invest on is something that should be carefully researched.

[00:12:36]

The World Gold Council has a website that centralizes all of our data research and analysis in one place at Gold Hub dot com. And there's actually another website that we started recently because we also very recently launched the retail gold investment principles, which are an extensive an extensive set of guidance for investors looking to consider gold and looking to buy gold. And we have a site that's focused just for retail investors and that can be found at retail investment dot gold. So, you know, I think for all different investors right now, they are looking at gold.

[00:13:07]

Overall, there's been a lot of interest in gold weather and that interest can be seen in terms of in terms of the overall inflow into gold. But also we've been very busy at the Gold Council. We've been fielding a lot more questions recently. So certainly the investor interest in gold has picked up significantly. And is the trading volume also up or are we talking about a lot of price action on a slightly tin market? The trading volume, I think, has also increased, but gold is not a thin market, is actually a very liquid asset class.

[00:13:39]

It's one of the most liquid asset classes in the world overall. It's just behind some of the major currency pairs in terms of liquidity and actually ahead of major sovereign bond markets. I think gold is more liquid than the German bond market, for instance, more liquid in the UK gilt market. So it's it's actually very liquid and it's tradable across different markets in the world. So it's accessible during many times, during most times of the day. I got to say, though, the website that you just referred to, Gold Hub dot com, I'm just looking at it right now.

[00:14:09]

And it's some terrific charts, including with liquidity and comparison with other assets and so on. So good job with that. OK, thank you. Pass that on to our research team. We made that. OK, so I will stay with the question of gold as an investment tool. So we all know it doesn't pay any dividend. But as you pointed out, as nominal yields and bonds keep going lower, you know, of course, that it becomes on a relative basis attractive.

[00:14:33]

But in the past, you know, currencies used to be called back and there aren't any major currencies backed by gold either. So beyond jewelry, I'm going to ask a very naive question. Where else do we use gold? Sure. Well, you're right.

[00:14:46]

You said that gold is not linked to any currency anymore. It's a freely tradable asset now, and its value is entirely determined by supply and demand, just like any other asset. But it does have intrinsic value. And that intrinsic value comes from its rarity, its durability, its universal acceptance, its lack of credit, risk. And gold is used in many applications. You already mentioned jewelry and jewelry still accounts for half of total gold demand annually. But gold is also used in many industrial applications, such as electronics and health, tech and aerospace.

[00:15:18]

And these industrial uses of gold make up about 10 percent of total gold demand per year as well. So that's 50 percent for jewelry, 10 percent for industrial demand. The remainder of gold demand is the financial demand for gold, which is split between private investors and then the official investors, the central banks. I think a big part of why modern investors value gold is because it's an asset class that behaves unlike any other. It is very low correlations to other.

[00:15:45]

Widely held asset classes, which makes it an excellent portfolio diversifier, it has safe haven characteristics which can help manage downside risks like what we're witnessing now. But in better times, gold actually exhibits some procyclical behavior, too, because like I said earlier, a large component of gold demand comes from procyclical elements like jewelry and electronics. So generally speaking, those things are bought up when times are good. So that's what actually makes gold an interesting investment tool because it's just very, very, very idiosyncratic.

[00:16:16]

It doesn't behave like other assets because it has both pro and and countercyclical demand elements to it.

[00:16:24]

Fair enough. You know, in my travels, especially in the Middle East, I've seen all these gold souks where people go and buy the bars that you were talking about earlier. People can also buy stocks of gold miners or they can buy like a precious metal mutual fund. Or and you touched upon this a little while ago. They can buy a gold ETF. I'm sort of interested in how a gold ETF works and how big of a phenomenon it's become.

[00:16:51]

Sure, you're right.

[00:16:52]

There are many, many different ways to gain exposure to gold. You've already mentioned some of them. Everyone has its own set of considerations. Gold backed exchange traded funds or ETFs have actually grown to become one of the most common ways to invest in gold. Gold ETFs first appeared in the early 2000s and have now grown to become a major segment of total gold demand. Gold buying an ETF form has seen pretty tremendous growth this year as investors have moved into gold.

[00:17:19]

They're actually at all time highs in terms of both their, um, and also the amount of gold that they represent. And just to give you a sense of how large the inflows into gold ETFs have been just the first seven months of this year. So year to date, we've seen nine hundred and twenty five tons of gold being bought through ETFs in the first seven months. And that's already almost 50 percent higher than the amount of gold bought by central banks in all of twenty eighteen, which was the highest year ever for central bank purchases.

[00:17:47]

And that was just in seven months. So gold ETFs have become very popular. There have been massive inflows into it this year. And I guess you ask how a gold ETF works. So essentially it's just a fund that invests in physical gold and that fund is then listed on a stock exchange. It has shares that can be bought or sold on the public market just like any other equity. Shareholders then own a part of the fund, and that fund, in turn owns physical gold, the price of the ETF is designed to track the spot gold price.

[00:18:17]

So this gives investors a very easy way to gain exposure to the gold price without having to worry about management aspects like vaulting and storage that, you know, are things you consider for physical gold. There are many different gold ETFs available in the market. So I counsel your listeners to do thorough research on each different offering before investing. And there are actually some ETFs, gold ETFs listed in Singapore as well.

[00:18:41]

But generally speaking, this goes back to your earlier point about there being quite a bit of liquidity in the gold market that the bid ask on. These ETFs are not particularly white. I mean, it depends on the ETF. There are some ETFs that are very, very big and therefore they're very liquid in the bid. Ask is very is very narrow and there are those that are not so big. But, you know, there they have different purposes in mind.

[00:19:04]

They have different sort of target investors in mind. The largest single gold ETF is the gold ETF, which is a lot of institutional investors like to invest in that ETF. But then there are smaller ETFs which actually have smaller management fees, for instance, smaller expenses, expense ratios, which might be maybe more suitable for, let's say, retail investors or investors who just want to buy and hold. It depends on what you need. So like I said earlier, I think every individual investor should should look at what the ETF offering is, look at the specifics of that ETF before making a choice.

[00:19:36]

Sure, sure. Chuckles Just a sidebar. We have been talking about commodities, particularly crude oil in recent podcast, and where we sort of underscore that, you know, oil, you know, sort of pumped out in one part of the world can be very different from the other part of the world. Gold is far more homogenous as a product and good. All right. Yes, that's true. Yeah, that. Yeah, that's true. It's refined, of course.

[00:20:05]

So it comes out and there might be some areas where the gold content is higher in the ore that's that's dug out and some areas where the gold content is lower. But ultimately, it's always refined to to to its pure form. And then when it's in bar form, there are different standards that govern the purity of the bars. The London good delivery standard, for instance, has one purity. There are different purity standards in different markets. For instance, when gold is used in jewelry, they might have a different purity standard because it might be easier to handle for jewelry purposes, for instance.

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But overall, it is much more uniform than than oil, right?

[00:20:37]

I suppose the other big difference is storage, where a very big role in oil futures. We saw futures going negative earlier this year. I suppose, as you pointed out earlier, you know, you can pack a lot of gold in a very little bit of space. So that is not an issue. That's right. That's not an issue. For the most part. There's no real storage constraints like we see with oil in the gold market right now.

[00:20:59]

Right. I want to talk about gold markets from geography perspective. I know you mentioned earlier China being a large producer, but China is also a large consumer of gold. Then there's India and tossed up on the Middle East. These three parts of the world are going through very different economic fortunes. China sort of has come back from the pandemic and beginning to flex its muscles gradually. India is in the middle of the pandemic and suffering tremendously in the Middle East also is right in the heart of the infection outbreak right now.

[00:21:36]

Give us a sense of these three gold markets. I mean, depth demand, that sort of stuff. I'm sure you're right. China, India, the Middle East, they're their major markets for gold. Actually, I think that the rise of China and India specifically have led to a pretty big increase, structural increase in gold demand since the turn of the century, because both of these countries, they have strong cultural affinities for gold. The gold plays an important function during key festivals and milestones and celebrations in both cultures and in the Middle East as well.

[00:22:08]

So China is now the largest gold market for physical gold and accounts for about a quarter of annual physical gold demand. India is the second largest market, just under a quarter. They're actually quite close, both countries, in terms of total demand for gold. But they're in different stages of recovery right now. And because of the impact of the pandemic during the first and second quarters of this year, there has been a drop off in gold jewelry, buying physical gold, buying in both markets for obvious reasons, people could not go out to to buy gold in markets and in shops.

[00:22:39]

But that's largely been replaced by the massive financial demand for gold that we've seen during the first half of the year as well. You mentioned the Middle East to the Middle East is also major gold market, but of course, it's divided into several different separate national markets. And Turkey is actually very, very important. Gold market, too. In Turkey, gold is quite integrated in the financial system, actually, so individuals can send gold to one another.

[00:23:03]

For instance, many people can have gold accounts with banks and even the. Central Bank of Turkey has quite a very a unique system in place called the Reserve Option Mechanism, where the commercial banks in Turkey can actually deposit part of their gold with the central bank, with the central bank as part of their gold reserves overall. So I'd say in the last two decades, there's been a general shift of gold demand toward the east and away from the west.

[00:23:32]

It's not to say the West is consuming less gold, it's just that the east, the emerging markets is consuming significantly more gold. And I think over time, as these economies continue to grow, as the purchasing power of their citizens continues to rise, these markets will still be major, major pillars of the gold market going forward. Absolutely. Chalco, I don't know if you noticed last week the Reserve Bank of India made this announcement where they have increased the amount people can use gold to back up loans.

[00:24:00]

So they think it was seventy five percent limit up to the value that the bank would lend to people they raised to 90 percent. So this whole LTV gold back, little sort of stuff, I suppose, is one of the things that the Indians have been trying for a long time, because the country between the temples and people's homes owns so much gold to financially. That is, I think, something that the authorities keep struggling in at a time like this when the country is sort of struggling with respect to credit intermediation or really economic growth.

[00:24:32]

Tapping into that reserve, I suppose, makes sense from a from a risk management perspective. So I was following the RBI meeting last week. And I think that us I want to ask you something on a different track. I mean, we've talked about the investment aspect of gold, but since you are representing the organization that's sort of trying to advocate for gold and you did point out earlier that the major producers of gold are not necessarily in Africa, but you mentioned China and the US and elsewhere.

[00:25:04]

But we do know that gold is produced in some parts of the world afflicted by conflict. How does your organization promote responsible and transparent production and trading? Sure. Well, that's a very important point. Thank you for bringing it up. And this area is actually a key part of the World Gold Council's mission. And there are several ways in which we're engaging with these issues in 2012. For instance, we launched the conflict free gold standard, which codified a common approach by gold producers to assess and provide assurance that the gold that they've extracted was extracted in a manner that does not cause or support or benefit any human rights abuses.

[00:25:41]

Last year we launched the Responsible Gold Mining Principles, which is a framework that establishes what constitutes responsible gold mining and addresses key environmental, social and governance issues that impact the gold mining sector as well. So so ESG is definitely a major focus area for us. And the World Gold Council takes parts in many discussions and dialogues run by international organisations and the industry focused on ESG. And we're committed to supporting the mining industry to make a positive contribution to sustainable development as well.

[00:26:12]

But there are many other fronts in this in this topic as well. On the trading front, we work with many regulators in different markets to enhance and improve how gold is traded. So that includes issues like taxation, macro prudential policies, et cetera. And then another major part of what we do is just simply education. We educate investors and institutional investors, individual investors or central banks like myself, just to give them as much information about gold as possible so they can make the most informed decision about gold.

[00:26:42]

That is good to know, and I wish you the very best of luck in pursuing along those lines very, very insightful discussion. Thank you so much for your time and insights. My pleasure. Thank you for having me. This was great. Thanks to our listeners as well. Copi Time was produced by Martin Tuqay. It is for information only and does not represent any trade recommendations. All twenty five episodes of Copy Time are now available on YouTube and all all major podcast platforms, including Apple, Google and Spotify.

[00:27:14]

Have a great day.