So what if the price of gold is low?


  • Business
  • Saturday, 18 Oct 2014

THE low price of gold, which is now at about US$1,238 per ounce, has caught the attention of even my doctor. Seeking treatment for a nagging knee injury, the topic of discussion was whether it is a good time for his wife to shop around for some jewellery since prices are at its lows last seen early 2013.

Incidentally, this was the second time in the past week that the topic of gold was a subject of intense conversation. Last week, a colleague got excited on news of people making a beeline to jewellery shops in Penang because the price of gold had come down. Some contemplated putting some money aside to buy jewellery for their children.

Obviously, the logic behind this interest for gold is that, since prices have come down from its highs of US$1,900 per ounce in May 2011, it has probably reached its bottom.

But, really, does timing matter for the ordinary folk when it comes to purchasing gold? Are they experts to sense that this is the ultimate low for gold prices?

Like crude oil, gold is a complex commodity. It used to be the yardstick to gauge the strength of a currency, a practice that no longer exists. These days, gold is more seen as a safe bet to hedge against inflation.

Gold on its own, does not generate any productive returns for the ordinary folk. It does not give dividends and there is a heavy holding cost. For some people, jewellery is a symbol of wealth that can be displayed.

But for serious investors, gold is not an ideal investment. The precious commodity is down almost 35% since its highs in 2011 and down by about 10% from levels of US$1,350 per ounce seen a year ago due to a minor rebound.

The primary reason why gold went to dizzy heights between 2009 and 2011 is because of the loose monetary policy adopted by the US that many feared would spark off inflation.

As gold was seen as a natural hedge against inflation, there was a rush for the precious metal.

The US quantitative easing did spark asset price inflation around the world, especially in emerging economies. But the significant asset price inflation was seen in property and equities market in some cases.

As for gold, it has been on a steady decline since the second half of 2011.

Even now, when the bond-buying programme is coming to an end, inflation has not gone up in the United States and most parts of the world.

In fact, the fear is that the global economy is going through a bad patch of slowdown again and central banks cannot afford to adopt tight monetary policies.

Most commodities have been on the downtrend since early this year, Gold has not been spared. So far, there is no sign as to how much more it can fall although there is a rebound now.

Considering this situation, could gold fall further?

It is possible, especially now that there is more pressure for crude oil prices to fall and the US dollar to appreciate. The variables are far too many for anybody to make a reasonable guess of where it is going to head in the next few months.

For ordinary people, they view gold as a good asset to fall back in times of despair. But the majority of those owning it do not depend on that precious metal for funding. Instead it is mostly kept in safe deposit boxes for years.

Except for some selected components in the electronic and health industries, gold is hardly used in the manufacturing sector in a big way compared with the likes of iron ore or coal.

The real demand for gold is actually limited.

For the ordinary folk, they tend to buy gold and store it away for their children or grandchildren. Hardly is there any trading.

So if gold is going to be purchased and kept locked up for years, what is the big rush to buy the item?

Today, it has come down. But like all commodities, it is subject to the boom bust cycle. It may go down lower in the next few months. Or it may go up again, depending on traders at the international scene.

The big drop in commodity prices since July this year that has accentuated the fall in gold prices is due to the rise in the US dollar. Commodities are all traded in US dollars.

The Federal Reserve will stop its bond buying programme end of this month, following which all eyes will be on when the US will start raising interest rates.

At the moment, that is unlikely to be the scenario as the Fed wants to see clearer signs of a US recovery.

But when the time comes for the US to raise interest rates, it should trigger another round of money flowing back to there, causing the dollar to appreciate further.

Would gold price fall then when the dollar appreciates? Probably yes.

To the ordinary folk who tend to buy it and keep it locked up to be passed on to their children and grandchildren, short-term volatility should not matter.

For those who are more adventurous and see gold as an investment, it would require a time frame of five years or more before they can see some returns – if they are lucky to time their entry and exit at the right time.

For instance, those who had bought the precious metal two years ago would be sitting on negative returns.

If any investor bought the metal in 2010 and had not exited, they would probably be just breaking even now. If the time value of money is taken into account, their returns would be negative.

Gold is no longer the commodity that it used to be. Now even countries tend to sell the precious metal when they are in trouble. Last year, some countries in eurozone contemplated selling their gold to raise money for the national coffers.

When that happens in a big way, there goes the value of the precious metal. It is really hard to predict where the price of gold is going in the future.

But one thing for sure, there is no hurry to purchase them because any climb up will be slow and steady.

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