Investing Smartly in Gold with NISA, Seizing Opportunities in its Unwavering Price Surge

The price of “gold” has been soaring, defying conventional wisdom…

Since the beginning of April, the price of gold has reached new highs both at home and abroad, and it shows no sign of abating. Since the beginning of April, the price of gold in Japan and overseas has reached new highs every day, with no sign of slowing down at all. In this article, we will explore the background of this rising market, and experts will explain how you can invest in gold with NISA.

Gold” is at the center of the conversation in overseas financial markets

While the afterglow of the Nikkei Stock Average reaching its highest level in 34 years is still lingering in Japan, the gold market is the main topic of conversation in overseas financial markets. Since last year, the price of gold has been on an upward curve in an almost unbroken line, and since the beginning of this year, the price has been rising to higher and higher levels one after another. The New York gold futures price, the international benchmark, hit the $2,300 per troy ounce (=31.1035 grams) level on April 3. The retail price in Japan is also moving in the 12,000 yen per gram range.

The main reason why gold is attracting attention today is not only the speed of its rise, but also the fact that it is soaring, defying all conventional wisdom.

A real asset that never loses its value

Traditionally, gold has been called “contingency gold” and has been preferred by investors as a “safe asset. The term “contingency gold” means that gold is more likely to be purchased as an asset in the event of an “emergency” such as war, a large-scale disaster, or a global economic crisis. In the case of paper assets such as stocks and bonds, their value may decrease significantly if the company or country that issued them is in crisis. Gold, on the other hand, is a “real asset” that has value in itself and will not lose its value.

In fact, since 2000, gold has been the only asset that has not lost its value in the aftermath of a crisis, such as the terrorist attacks in the U.S. in 2001, the Lehman Shock in 2008, the pandemic of the new coronavirus in 2008, and Russia’s invasion of Ukraine in 2010. Gold has been bought in every emergency.

Gold in times of crisis” is a thing of the past!

However, the current rise in the price of gold is not due to the fact that we are in an emergency. Indeed, the future of Russia’s invasion of Ukraine remains uncertain, and the Israeli-Palestinian conflict is intensifying in the Middle East. At first glance, the world economy and financial markets appear to be in a state of emergency, but a sober look reveals that the world economy and financial markets are not in turmoil. On the contrary, global stock prices and the dollar continue to rise.

It has been a common belief that gold as an asset is, in textbook terms, “inversely correlated” with the price movements of stocks and the dollar. Inverse correlation means that the price movements are “opposite,” which is why gold has been bought in times of emergency when stocks and the dollar decline.

However, since around 2010, gold has become “forward correlated,” meaning that its price movements follow the same trend, and it has continued to rise at a faster pace than stocks and the dollar. This is why gold has attracted so much attention in the financial markets.

The Global “Money Glut” Behind Rising Gold Prices

Why, then, has gold become correlated with stocks and the U.S. dollar, repeatedly reaching new highs under less than contingent conditions?　Of course, many factors are involved, but there is one thing that seems to be of critical importance: the increase in the monetary base. That is the increase in the monetary base. The monetary base is the amount of money supplied by the central bank.

Let’s take a look at the monetary base of the Fed, the most influential central bank in the United States. The monetary base, which had been increasing in line with the economic growth rate, suddenly began to expand rapidly in September 2008. The trigger was the “Lehman Shock. In order to cope with the credit uncertainty and economic crisis caused by the Lehman Shock, a large amount of money was supplied to the financial markets.

Since then, dollars have been issued every time a similar situation occurs, and in March 2008, an unprecedented amount of money was supplied as a policy response to the “new coronavirus” pandemic. As a result, the Fed’s monetary base swelled to about $6.4 trillion in December ’21.

This is not limited to the Fed. Japan, the EU, China, and other central banks have also been aggressively increasing their monetary bases as part of their economic and monetary policies. As of March 31, 2012, Japan’s monetary base stood at 666 trillion yen, a record high. This unprecedented “money glut” is thought to have led to a massive inflow of funds into the gold market as well as the stock market.

The expansion of the monetary base also has an inflationary effect on the real economy, which in itself is a reason to buy gold. Since inflation depreciates the value of money, gold, a real asset, is more likely to be bought. This is why gold is said to be resistant to inflation.

China’s Booming Purchase of Gold

The most conspicuous buyer of gold is China. Since the decade, central banks, especially those of emerging economies, have been increasing their gold holdings, with China and Russia among the most aggressive in procuring the metal. In particular, China’s central bank, the People’s Bank of China, bought a record 225 tons in ’23, according to a report by the World Gold Council, an international gold industry group.

It is believed that China and Russia are buying gold as nations in order to reduce their dependence on the reserve currency, the dollar. It is fair to say that this trend is growing stronger each year as the political conflict with the U.S. grows.

In addition, individual gold buying is also strong in China. China has always been a major consumer of gold, which is valued not only for jewelry but also for investment bullion. The combination of a severe real estate recession and falling stock prices has also increased the popularity of gold as an asset among individual investors. In 2011, China’s domestic demand for jewelry was 630 tons, while demand for investment bullion and gold coins was 280 tons, totaling 910 tons.

As a result, Chinese government and private purchases of gold totaled 1135 tons, or about 31% of the 3644 tons of production mined in the world’s mines over the last year. The Chinese buying spree is supporting the gold market (both data are from the World Gold Council).

You can also buy “gold” with NISA.

For those who are considering investing in gold, here are some gold-related financial products that can be purchased with a NISA account.

Aside from individuals with ample surplus assets that can be invested in gold, accumulation investment would be a safe bet considering the high volatility of the gold market. If this is the case, an index fund linked to the gold price would be an option. The following is a list of funds that can be purchased under the “Growth Investment Limit” of the NISA.

The four funds listed here are all “no currency hedge” types. The domestic gold price is a yen equivalent of the price displayed in “dollar terms” in overseas markets. Therefore, the price will be lower when the yen appreciates and higher when the yen depreciates. By choosing “no currency hedging,” you can prepare for the risk of a weaker yen in the future. Considering the asset-preserving nature of gold, it is preferable to hedge against the risk of a weak yen.

All four contracts use the LBMA gold price as their benchmark. All four mutual funds are index funds linked to the LBMA gold price (yen equivalent basis).

ETFs are also an option for advanced investors

ETFs are a type of investment trust listed on an exchange and can be traded on the market at any time, just like stocks. Some of these ETFs are linked to the price of gold and can be purchased through the NISA Growth Account. These include the SPDR Gold Shares, NEXT FUNDS Gold Price Linked Exchange Traded Fund, and the Pure Gold Exchange Traded Fund (physical domestic custody type).

However, when investing in ETFs, you need to do it “manually” except for some brokerage firms.

You have to place your own monthly orders. In addition, if you value low cost (investment management cost), you can use overseas ETFs. There are foreign ETFs that are linked to gold and can be purchased with a growth investment limit. This is an area for advanced investors to compare with various costs, but it may be worth considering.

What is the appropriate ratio of “gold” assets?

So, how much gold should be included in an asset? Until now, it has been said that it should be 10-15% of one’s asset holdings. The rationale for this is that “gold accounts for about 10% of the foreign currency reserves of each country’s government. (Foreign exchange reserves are foreign assets under the control of a country’s central bank that can be used at any time. (Foreign exchange reserves are foreign assets under the control of a country’s central bank that can be used at any time for foreign exchange intervention, etc.).

As mentioned above, gold has been in a forward correlation with stocks and the U.S. dollar for the past year or two. Since the diversification effect is fading, the probability that gold will fall along with stocks and the dollar when they start to decline is increasing. If the downward rigidity of the gold price is demonstrated when stocks and the dollar fall, and if it is reaffirmed that gold is “strong in a down market,” then it would be a good time to consider accumulating more gold. According to the Ministry of Finance, gold accounted for 4.7% of Japan’s foreign exchange reserves as of the end of March 2012.

Also, gold-related index funds do not pay dividends, unlike “Orcan (All Country),” which is very popular in NISA. Dividends cannot be reinvested, so if the investment period is long, investment efficiency may be inferior to that of a fund that pays dividends.

The gold market from last year to this year has been led by hedge funds in addition to actual demand as mentioned above (especially by CTAs, which specialize in commodity futures among hedge funds). It is characterized by large scale and high speed trading, and the risk of price fluctuation is increasing. Again, it is probably safe to invest in small amounts.