This article first appeared in The Edge Malaysia Weekly on January 13, 2020 - January 19, 2020

IT has just been a week into the new year and already, the share prices of two gold retailers have soared to peaks last seen in 2017. Poh Kong Holdings Bhd closed last Wednesday at 70.5 sen — its highest level since December 2017 — while Tomei Consolidated Bhd hit 59.5 sen, which it had not attained since May 2017.

This translated into a year-to-date gain of 41%, or RM84 million in market capitalisation, for Poh Kong, Malaysia’s largest jewellery retail chain operator. Tomei, which operates the Tomei, My Diamond and Goldheart outlets, has gained 34% year to date, adding RM21 million to its market cap.

However, both stocks retreated the next day, with Poh Kong ending at 62.5 sen, down 11% from Wednesday, and Tomei retreating 16% to 50 sen.

The erratic share price movements mirrored gold prices. Spot gold rose to US$1,574 per ounce on Monday — its highest level since 2013 — amid fears of war between the US and Iran following the assassination of Iran’s top security official, General Qassem Soleimani, by the Americans.

Iran retaliated by firing missiles at two American bases in Baghdad that apparently caused no casualties. Following this, Iranian Foreign Minister Javad Zarif tweeted that the Middle Eastern country had concluded “proportionate measures in self-defence against the US and that it does not seek escalation or war”.

The reassurance prompted a 2% dip in spot gold prices to US$1,547 per ounce last Thursday.

The roller coaster ride of gold prices is nothing out of the ordinary for Tomei group managing director Datuk Ng Yih Pyng.

“Uncertainties in the market have always impacted gold prices, such as the [fluctuations in] the US dollar and the trade war, which sparked interest in gold and caused prices to increase from the second half of last year. Of late, prices have [accelerated], given the recent tensions in the Middle East,” he tells The Edge.

“When prices increase, consumers tend to hold back on purchasing gold at the initial stages. However, if uncertainties such as the tensions in the Middle East continue to persist without a resolution in sight, consumers will start to accept the higher gold prices and resume buying activity in anticipation of prices increasing further,” says the industry veteran of 30 years.

Higher margins and the hike in gold prices resulted in Tomei’s net profit for the nine months ended Sept 30 surging more than 12-fold to RM6.06 million, from RM486,000 in the same period a year ago.

“At this juncture, we anticipate some early buying activity for the Chinese New Year celebration. And also, with 2020 being the Year of the Rat, which is a very good year for weddings, consumers may choose to buy early if they expect prices to increase further,” Ng says.

Poh Kong chairman and group managing director Datuk Eddie Choon Yee Seiong tells The Edge that in the current period of high gold prices, consumers tend to purchase gold wafers and bars.

“This will help mitigate the drop in demand and revenue for gold jewellery. Sales of our gold inventory that was procured at lower gold prices will also result in higher profit [to be recognised], provided there is no significant drop in the total gold weight sold.

“Our prudent practice of natural hedge in procuring gold will reduce the impact of an unexpected fluctuation in gold prices,” he says.

In its first quarter ended October (1QFY2020), Poh Kong’s net profit more than doubled to RM8.08 million from RM3.16 million a year ago.

But it is not just retailers that have been impacted positively by rising gold prices.

Gold mining operator Bahvest Resources Bhd is anticipating fatter margins.

“Gold is an internationally traded commodity and the volatility of gold prices is very much influenced by demand and supply, taking into account many macro-international political and economic factors. As a miner, we are not too concerned about the fluctuation of gold prices,” Bahvest managing director and CEO Datuk Lo Fui Ming says.

“Rising gold prices are certainly in our favour as we are earning better margins.”

In the first half of its financial year ending March 31,2020 (1HFY2020), the Sabah gold mine operator returned to the black, posting a net profit of RM9.44 million against a net loss of RM4.16 million a year ago.

However, its mining unit saw a decrease in profitability during the period, primarily because of lower net gold production.

“The drop in production and gross margin was due to bad weather and some technical adjustments in the production line. Going forward, we hope to see increasing production,” says Lo.

Compared with its closing price of 50 sen on Dec 31 last year, Bahvest shares have since climbed 6% to close at 53 sen last Thursday, which translates into a market capitalisation of RM649 million.

Can the gold rally sustain?

With gold being a safe haven asset, the sustainability of its rally is anyone’s guess, given the uncertainties of geopolitical risks.

Saxo Bank head of commodity strategy Ole Hansen sees gold consolidating above US$1,500 per ounce for the rest of the first quarter before inching north to peak around US$1,625 per ounce later in the year.

“The short-term consolidation risks also take into consideration the elevated level of hedge fund positions, which has become quite elevated and which, in the short term, could act as a drag on the price.

“Geopolitical events such as the early January US-Iran standoff have supported gold but only for a relatively short period. In order for the yellow metal to climb further, one or more of our expectations for 2020 developments need to be met. They are the US Federal Reserve cutting rates by more than expected, rising inflation concerns through higher input costs from energy and food, continued central bank buying (de-dollarisation) and a weaker dollar,” he tells The Edge.

In the well-known fairy tale, King Midas was granted his wish that whatever he touched would turn to gold. But in reality, one man — US President Donald Trump — will have much to do with where gold prices could be headed.

More likely than not, the next significant movement in the direction of the gold price direction will be triggered by a ferocious tweet from the leader of the world’s largest economy.

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