This week we start a monthly column by Anthony Dass, head of AmBank Research who will be writing on issues related to the economy and capital markets. With 23 years experience as an economist, Anthony has deep knowledge of economic matters as well as issues and policies on Malaysia and other countries in the region. He kicks off the column on gold.
THE decision by Britons to leave the European Union in a referendum on June 23 triggered strong selling across global stock markets and led to several currencies turning volatile.
Such uncertainty added with fears for more Brexit-linked tremors has pushed gold prices up 7% since June 23 and 26% in 2016, to U$1,349 per ounce levels as global and local investors envisage gold as safe haven.
For now, currency and financial market outcomes on the global front are arguably extreme. Although stocks bounced back on the notion that contagion from Brexit has been contained after the rout wiped out US$3.6 trillion from equity market, it remains unclear if the worst is over.
Besides, there are still hidden risks lingering in the asset markets.
With the US dollar rising as currencies across the globe decline, the US Federal Reserve, which had signalled four interest-rate hikes for 2016 following its 25 basis-point hike in December, the first in nearly 10 years is unable to do so now. Brexit raised investors’ perception that the Fed will not raise rates throughout this year.
In fact some are factoring a possible rate cut, while some feel the market is reading the Fed wrongly and expect a rate hike by December this year. Is the Fed caught in an interest-rate trap?
Cheap and loose monetary policy used to revive the world economy from the 2008 Global Financial Crisis (GFC) somewhat failed to steer global growth back to the pre-crisis level.
Global growth is now at a “new normal” which is lower than the 2008 pre-crisis, partly affected by slower global productivity growth and displacement of productive human capital stock.
With the potential fear of a domino effect from Brexit, further easing of monetary policies by the global central banks with the aim to support economic growth is on the cards.
There is increasing possibilities for the Fed to keep interest rates on hold in both July and September and probably December too.
The Bank of England could reduce the policy rate while the European Central Bank may inject more liquidity.
Continuing such cheap and loose monetary policy risk losing its effectiveness especially if confidence weakens and fears creeps up for another financial crisis in the waiting. Investors dislike uncertainty, and we already had a lot of global economics and political uncertainty. Brexit added a lot more.
Uncertainties may induce investors to invest in safer assets. Gold is often one of the few perceived “safe haven” assets with liquidity. It is not associated or dependent on any monetary authority or economic policy and so is almost entirely intervention-risk free.
Ambiguity is likely to persist. Hence, the global currency war will go on with longer lower rates. These will benefit gold apart from bonds. So gold prices may continue to rally in the near term with investors’ allocations to gold continuing to grow.
China is still the world’s largest consumer of gold after outpacing India in 2013. In 2015, China consumed 956.7 tonnes of gold, compared to 864.3 tonnes in India.
The drop in India’s gold consumption is due to the current government that has been encouraging people to sell gold and earn better returns, rather than hoard it.
Besides, in recent years, due to concerns over India’s rising trade deficits, policymakers and the Reserve Bank of India had introduced steps to discourage imports of the yellow metal; the central bank was concerned that gold was a “dead investment”.
Indian jewellery demand hit a seven-year-low of 88.4 tonnes in the first quarter of 2016, down by 41% year-on-year. China’s jewellery demand fell by 17.9% year-on-year in the first quarter of 2016 to 179.4 tonnes.
Despite the drop, we expect the current global uncertainty will see local demand for gold picking up. There is too much going for gold at the moment.
Thus, gold price is likely to average around US$1,300 per ounce for the full year of 2016. That means, gold price per ounce could trade around US$1,400 per ounce.
Spiking above US$1,400-US$1,500 per ounce cannot be ruled out, given uncertainties remain strong added with a strong relationship between uncertainty and investors that will see a shift towards gold.
So gold holders might wish to use the current spike to take profits by selling some holdings.
During the pullback on gold prices, one should buy gold as its price remains strong on the upside with uncertainty still there. Besides, they should hold onto some gold since it is not distrustful.
Also, they could buy gold in British pound or euro given the stronger Brexit impact on these two currencies. But the upside to gold price could be limited by a stronger US dollar.
Even after the year-to-date rally, gold price remains about 40% below previous cycle highs from 2002 to 2011 when gold prices surged 582%.
Anthony Dass is head of AmBank Research, AmBank Group.
This week we start a monthly column by Anthony Dass, head of Ambank Research who will be writing on issues related to the economy and capital markets. With 23 years of working experience as an economist, Anthony has deep knowledge of economic matters as well as issues and policies on Malaysia and other countries in the region. He kicks off the column on gold.