Asia going for gold

  • Business
  • Saturday, 16 Nov 2013

Falling gold price reignites demand as the bullion loses its appeal in the West.

GOLD, as an investment, has had a horrid year and will probably continue to disappoint investors next year. But Asian consumers are unperturbed, as they see the sharp decline in bullion prices as a golden opportunity to stock up their hoard of the precious metal.

The benchmark spot gold price in New York had dropped 22% year-to-date at US$1,287 an ounce yesterday and was heading into its first annual loss in more than a decade.

Some analysts predict prices will fall even lower in 2014, with Goldman Sachs’ commodity research head Jeffery Currie declaring gold a “slam dunk” sell for next year.

Currie also says that gold may “overshoot” below the US$1,000 mark in the near term as fund managers and savers in the West continue to unwind their positions in gold investment products ahead of the US Federal Reserve’s plan to taper down its monthly bond-buying programme.

HSBC chief metal analyst James Steel announced that “gold’s more-than-decade-long bull market ended this year.”

The price of gold has had a spectacular run up since the start of the new millennium, but gold’s shiny investment status as the safest bet at times of crisis may have run its course, at least in the West, as risk appetite return for fast-money fund managers.

Since the burst of the US dotcom IT bubble in 2000, the price of gold has soared from US$300 an ounce to a dizzying height of US$1,920 on Sept 6, 2011. The bullion more than doubled its value from early 2007 to mid-2011 after the Lehman Brothers collapse and the start of Greek crisis in the eurozone.

Gold supporters in past years argued that loose money-printing programme by central banks in developed economies to jumpstart growth will fuel inflation on a global scale that will render paper currency useless everywhere.

It was the fear of an imminent economic collapse in 2009 that drove investors into gold as they sought to protect their capital and ride out the unfolding turmoil in the West. But as the worst of the recession passes, gold increasingly loses its shine.

Analysts say as the outlook for the global economies brightens in recent months, billions of dollars that were poured into various sophisticated gold investment products have been pulled out and shifted into equities and other riskier investment classes. The demand for gold, which pays no dividends and is just a store of value, suddenly vanished.

The steep fall in April this year plunged gold into bear market territory and marked a remarkable turnabout for the precious metal. Even some of its strongest supporters, including billionaire hedge fund manager Paul Johnson, halved his stake during the second quarter of this year in SPDR Gold Trust, the biggest gold exchange-traded fund (ETF) following the rout.

The gold market has had its share of spectacular booms and busts before.

Nobel prize winner for economics Paul Krugman wrote that gold historically has been anything but a safe investment, and can sometimes yield big gains as in the 1970s and the period between 2001 and 2011. But he noted that the 1970s run up was followed by “an epic plunge” with the real value of gold falling by two-thirds.

Stock investment guru Warren Buffet too had said that he was never a fan of gold as an investment. He argued that gold doesn’t do anything and he would rather put his money in more productive ventures such as a farm or a company.

Strong demand

While falling gold prices may whet the appetite of legendary investors like Buffet, a rising number of households in fast-growing developing Asian economies are stepping up their purchases of the metal as ornaments and investment, according to the World Gold Council (WGC) on Thursday.

“The growth we are seeing in jewellery, bars and coins, in particular, demonstrates once again the unique diversity of gold demand, as different sectors increase in prominence at different points in the global economic cycle, clear evidence of ebbs and flow of what is an extremely liquid market,’’ WGC’s managing director for investment Marcus Grubb says.

He says two key themes have emerged during 2013. The increasing level of consumer demand off-setting outflows from ETFs and the geographical flow of gold from western to eastern markets.

In Europe, gold is being refined from larger bars suitable into smaller sizes preferred in Asia, WGC says. Exports of bullion from the United Kingdom to refineries in Switzerland rose more than 10-fold to 1,016.3 tonnes in the first eight months this year.

China is poised to overtake India as the world’s largest consumer of gold as consumption is expected to reach 1,000 tonnes this year. Since 2008, demand for gold in India more than doubled, while consumption in China rose almost 350%.

The two big countries, combined with fast-growing markets in Thailand, Indonesia and Vietnam, will account for 60% of global gold consumption this year.

“Projected income gains by the World Bank and HSBC growth forecast imply that China will remain a strong buyer of bullion,” commodity analysts at HSBC wrote last week.

They argue that China is “the single most bullish factor” in the gold market right now, and if China’s demand for gold cools in 2014, without a pick up in physical demand from India or a revival in Western investment in ETFs, then the outlook for gold price in 2014 will probably will be subdued.

WGC says on Thursday that demand for gold in the third quarter of 2013 fell 21% year-on-year to 868.5 tonnes, while supply of gold declined 3% to 1,145.5 tonnes during the same period despite modest increase in mines production.

The high gold price in recent years has spurred mining companies and adventurous entrepreneurs to open new mines and increase production. But the slump this year has forced a growing number of smaller and unprofitable operators to cease business.

Earlier this week, Malaysia Smelting Corp Bhd said it had set aside RM34.5mil for impairment charges and other provisions after the company and its South Korean partners took the painful decision to close their gold and base metals mining operations in the Philippines.

Analysts at RHB Research Institute think that bill will probably be higher, assuming the group was unable to get a decent price for its processing plant there. Given the current bearish mood in the metal complex, it is a buyer’s market out there.

But like many other things, the price of gold is determined by demand and supply. Demand for gold in Asia, which is already at a record, are poised to increase even further amid rising affluence in the region.

Falling prices may only spur their hunger for gold.

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