Gold rush comes to town

TheStar Sat, Aug 01, 2020 10:40am - 5 months ago

Added shine: Gold bars and coins being stacked in safe deposit boxes in Germany. The metal’s bullish trend has been attributed to massive US stimulus measures. — Reuters

A NEW record for gold prices appears inevitable.

After hitting an all-time high of US$1,980 an ounce over the week, the precious metal could well be on its way to test US$2,000 an ounce in the near term, according to several analysts.

They attribute this bullish trend to the massive stimulus measures from the US Federal Reserve, which has pushed down bond yields and resulted in the weakening of the US dollar, as well as uncertainties arising from the Covid-19 pandemic and geopolitical tensions.

In general, gold has surged nearly 30% since the beginning of the year. The last two weeks alone, it has gained almost 9%.

The strong surge in gold prices has also benefited Malaysian jewellers, namely, Poh Kong Holdings Bhd and Tomei Consolidated Bhd. Both companies have seen their share prices rise to multi-year highs in tandem with the spike in gold prices.

The last two weeks alone saw Poh Kong’s shares rising 67% to close at 78.5 sen on Thursday, while Tomei’s shares had almost doubled to 86 sen.

Similarly, the TradePlus Syariah Gold Tracker, which is the country’s first syariah-compliant commodity exchange-traded fund (ETF), has also rallied.

Year-to-date, the gold ETF has increased by almost 32%.

One fund manager tells StarBizWeek that while the surge in gold prices has drawn investor interest to local jewellers, the sustainability of the upward trend in their share prices will remain dependent on fundamentals.

“As long as the outlook on gold prices remains positive, the share prices of locally listed jewellers will remain supported at elevated levels. Strong gold prices will help lift the earnings of these companies, and hence, the positive sentiment towards their stocks, ” the fund manager with a local financial institution says.

“But eventually, it is the fundamentals such as the price-earnings (PE) ratio, revenue and balance sheet metrics of these individual companies that will determine the sustainability of their share prices, ” he adds.

At current levels, both Poh Kong and Tomei are trading at around 12 times PE, and 0.57 times book value.

Although gold prices have reached new highs, some analysts continue to see further upside for the precious metal.

Schroder Investment Management, for instance, argues that gold and gold equities in particular are signalling that this (rally) cycle has a lot further to run.

In a recent note to clients, the fund management company says against a backdrop of record high global debt, it believes the economy is moving through a major epoch-change in global macro policy towards a much greater acceptance of inflationary outcomes.

“The result is likely to be more deeply negative real interest rates and greater risk of broad currency debasement. In this environment, continued increases in gold allocations could have extraordinary impacts on aggregate private gold holdings, ” Schroder points out.

“We don’t see why gold prices should be somehow capped at current levels at all in such an environment, ” it adds.

For gold producers, current operating conditions are exceptionally good, and stand in stark contrast to 2011, when gold reached its then-record high of US$1,922 an ounce, Schroder says.

“On the revenue side, gold prices are being driven by understandably strong demand for gold as a monetary hedge. Meanwhile, operating costs remain broadly under control and management attitudes to large scale capital spending remain conservative.

“This is leading to both record operating margins and record forecast free cash flow generation, which is likely in turn to trigger material increases in distributions to shareholders. Despite this, gold equities have barely begun to outperform the price of bullion itself, another sign this cycle has much further to run, ” it explains.

Also positive on gold is Goldman Sachs, which expects the safe-haven metal to US$2,300 per ounce in the next 12 months due to growing concerns over the US dollar’s global standing as a reserve currency.

The investment bank says gold has plenty of room to run against a backdrop of rising geopolitical tensions, elevated political uncertainties in the United States, and unabated concerns over the Covid-19 pandemic.

Continuous streams of stimulus and measures taken by policymakers to fight the economic downturn caused by pandemic will lead to a significant rise in debt in the future. This in turn will lead to policymakers allowing inflation to rise, boosting precious metal prices, Goldman says in its report.

Similarly, Citigroup notes the current gold prices seem biased to stay higher for longer, with 2019-2020 emerging into a unique bull regime for the yellow metal.

The bank’s short-term target for the precious metal is US$2,100 an ounce, and it expects prices to reach US$2,300 in six to 12 months under a bullish scenario.

Even more bullish is Bank of America Corp, which is sticking to its April forecast for S$3,000-an-ounce gold over the next 18 months.

Meanwhile, UBS says it has added gold to its “most preferred asset list” in its global asset allocation.

“In a portfolio context, adding gold offers diversification benefits alongside providing shelter from volatility, ” the investment bank explains in its recent note.

UBS says gold around US$2,000 is the new normal, and expect prices to climb to as high as US$2,300 in its risk scenario.

It says low interest rates, weak US dollar, rising geopolitical tensions, especially between China and the US and limited supply growth due to restrained capital spending by mining companies will underpin gold’s price gain.

Credit Suisse, on the other hand, expects gold to experience a consolidation phase in the immediate term before resuming its uptrend towards US$2,000 psychological mark.

The Swiss investment bank says in its note despite recent pullback, it maintains its core bullish bias on gold, with immediate resistance seen at the psychological US$2,000 barrier.

Its technical analysts shows the next tougher resistance test will be at US$2,075 to US$2,080 an ounce.

“While our bias would be to look for a consolidation phase to unfold from here, a direct break can see resistance at US$2,175-US$2,180 next, then US$2,295-US$2,300, ” Credit Suisse says.

“Support for a pullback is seen at US$1,804-US$1,796, then US$1,765, with US$1,671 ideally holding, ” it adds.

Spot gold rose 1% to US$1,976 an ounce as at 2.51pm yesterday, after declining about 1% a day earlier, while the Bloomberg Dollar Spot Index slipped about 0.5%.

Gold is traditionally seen as an effective store of value and an insurance against inflation to preserve wealth. It is also widely regarded as a “safe haven” in times of economic uncertainties and market volatility.

But gold investment is not for everyone.

Legendary investor Warren Buffett, for one, has always said gold is a bad investment. And reports say he is still not buying it, as the yellow metal is does not generate earnings or pay a dividend like a stock, or interest like a bond.

To some, gold is an emotional investment, with prices of the commodity often driven by fear, rather than fundamentals.

RHB Investment Bank regional equity research head Alexander Chia says the default action for those who have a very negative view of the future would be to run to a safe haven store of value such as gold.

However, he says, bear in mind that if you invest in gold, it’s a zero return.

“There’s no yield. But of course with most other risk assets also generating pretty low yields and with the interest rates in the US close to zero, then to them, it’s almost the same if you put your money in gold, ” Chia says.

Regardless of one’s view on gold, including the yellow metal in one’s investment portfolio remains a form of diversification.

And as money managers always say the key to successful investing is to create a diversified investment portfolio that reflects one’s appetite for risk.

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