Friday 29 Mar 2024
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gold_cap44_1073_theedgemarketsGOLD bugs boast that no other investment or asset class has stood the test of time the way gold has. They also claim that it makes sense to keep the yellow metal in your portfolio as a hedge against the volatility of weak currencies such as the ringgit, despite gold’s uninspiring prices.

Albert Cheng, managing director of Far East at the World Gold Council, says keeping gold when currencies are weak is “traditional wisdom”.

“Gold is a hedge against currency fluctuations. Assuming that all other factors stay the same and you are just looking at the weak ringgit, then buy gold. If the ringgit weakens further, you can use your gold to change for more ringgit. It is all relative of course, but in the long run, gold will safeguard your portfolio,” he says.

“We have run several models of investment portfolio and what we have found is that any portfolio with just 4% of gold in it would see a boost in its performance. For example, when the European Central Bank embarked on quantitative easing, the euro declined in value. Gold, however, appreciated, and any investor who had held gold between the first quarter of 2014 (1Q2014) and 1Q2015 would have enjoyed a 15% appreciation in gold price,” Cheng explains.

It is an emphatic call from a gold enthusiast to buy the precious metal despite the current price environment. Since reaching an all-time high of US$1,921.15 per troy ounce in 2011, gold prices have come down and remained sluggish. Based on Bloomberg data at press time, the yellow metal was trading at US$1,177.04, a level reminiscent of that in 2010, just before the last gold rush.

It is worth noting that while the price of gold had depreciated 12.4% in US dollar terms over the last one year — falling from US$1,322.20 to US$1,177.04 — it had actually improved by 4% in ringgit terms, from RM4,255.77 to RM4,427.17.

During the same period, the US dollar appreciated against the ringgit by as much as 17.07%. Year to date, the US dollar has risen 7.74% against the ringgit, and analysts say there is more room for weakness.

TA Securities technical analyst Steven Soo predicts that the ringgit could weaken to as much as 3.90 against the greenback in the event of a sovereign credit rating downgrade.

To this, DAR Wong, an investment strategist and director at Singapore’s Dektos Investment Corp Pte Ltd, says, “Investing in gold denominated in ringgit will help you lock in your rising profits in Malaysian gold and neutralise the devaluing ringgit.”

Experts say that at the current level, gold prices have “bottomed” or are “close to finding a bottom”, offering a good entry point to those who have been eyeing the gold market.

This means that common dominating factors such as the strengthening US dollar and the market’s anticipation of a hike in interest rates by the US Federal Reserve — often blamed for putting pressure on gold prices — have mostly been priced in by the gold market.

Cameron Alexander, manager of precious metals demand Asia at Thomson Reuters GFMS, says, “We think that the price in the short term could see a bit of weakness — currently, it is trading at about US$1,180. We could see prices go lower in the summer months, maybe lower to US$1,100 to US$1,125. We expect that the US interest rate hike will come in July or August, but we do not think it will have a big impact on the price at all given that it is already factored into the price at this stage.

“It is towards the end of the year that we think prices will start to move a little higher, and we could see prices move closer to US$1,200 and US$1,300 by year-end — and they should also move in 2016 and 2017 (to US$1,400). So, we see gold prices edging higher in that period.”

cheng_cap44_1073_theedgemarketsThe potential upside is also boosted by the fact that the supply of gold is expected to dwindle as investment into discovering new stocks have tapered off.

“There is not much gold readily or immediately available. It takes six to seven years before what is mined can be turned into something commercial. There has not been any major discoveries of late. I expect supply to top this year from the last seven to eight years of exploration. But we are not seeing that level of investment into exploration anymore,” says Cheng.

Based on data from the World Gold Council, mine production grew marginally by 2% year on year in the first quarter of this year to 729.2 tonnes. But it projects that growth in supply will fade as the year progresses and we will likely see negative comparisons in the second half of the year.

Whether or not gold prices have reached a bottom, Alexander believes that we will not see a gold rush like the one in 2011, when the price breached historical levels. That kind of price movement would require “some kind of stimulus”.

A sustained rally in the equity markets could still draw those looking for high and quick yields away from the glitter of gold.

Looking at the global equity markets, the US, European, Japanese and Chinese markets appear to be improving. In the last one year, the Standard & Poor’s 500 Index has risen 7.41% while the Dow Jones Industrial Average has increased 6.2%, Japan’s Nikkei 225 surged 35.26% and Hong Kong’s Hang Seng Index climbed 14.94%.

However, CME Group executive director Harriet Hunnable says investors should still hold on to gold. “We have seen people trade gold when the equities market is booming so they can give themselves a bit of a hedge in case the equity market comes off, or if they are concerned about the amount of debt the central bank is holding through quantitative easing and so on. A number of people have concerns, and gold gives them the opportunity to mitigate some of that risk.”

Perhaps, a “pop” in the equity market could be both a reality check and the remedy that the market needs for gold price’s capped upside.

Aims Asset Management managing director David Crichton-Watt warns, “The equity and bond markets are the competition for gold, and gold will always do well when these two markets are in trouble. The rise in the US equity markets has now lasted longer without correction than any previous bull market. It is impossible to say when the bubble will pop, but it must be quite soon.”

With geopolitical tensions between the western world and China and Russia, uncertainties in Ukraine and the Middle East, economic instability in troubled states such as Greece, and the older population in Japan drawing on their pensions, Crichton-Watt asserts that the catalyst for higher gold prices, or rather the devaluation of paper currencies, could arise at “any time”.

This makes getting into the gold market now as good a time as any for investors looking to safeguard against the risks in equities.

As Cheng puts it, “If you want to buy insurance, you cannot wait until you are sick. Then, it would be too late.”

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This article first appeared in Capital, The Edge Malaysia Weekly, on June 29 - July 5, 2015.

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