Should you buy gold?

As good as gold: Gold refining and manufacturing bar in Argor-Heraeus SA in Mendrisio, Switzerland. Some investors favour gold as a ‘safe haven’ in times of economic uncertainty. — Reuters

HARRIS Shah has been buying gold as an investment for the last eight years.

The 32-year-old engineering graduate, who left his job to be a full-time e-hailing driver in 2017, says he regularly sets aside a certain sum to buy the precious metal “when the price is right”.

“Personally, I believe gold is the best way to secure and preserve my wealth for the long haul; but what’s most important to me is that I believe this investment complies with my religion,” Harris tells StarBizweek.

“My view may be a bit unconventional, but honestly, I don’t put my money in any other asset class except gold,” he says.

Harris says he keeps his gold not just in their physical forms such as coins and bullion bars, but he also holds them in paper form, that is, a gold savings account with a local bank.

While it is up to an individual’s discretion as to how one manages one’s own investment assets, some financial experts do question the wisdom of building a portfolio entirely out of gold (or just one asset class for that matter), noting it may not be a very good idea.

This is because diversification is key to sound investment planning, they say.

Diversifier role

There are differing opinions among financial experts about owning gold as a strategic asset and long-term investment.

Some may favour the precious metal as a “safe haven” in times of economic uncertainties and a viable hedge against rising inflation and currency fluctuation, but there are others, such as legendary investor Warren Buffett, who see gold as an unproductive asset and, therefore, a poor investment choice.

The divided views aside, gold can play a role as a diversifier of portfolio.

The World Gold Council (WGC), for instance, recommends a gold holding of between 2% and 10% of one’s portfolio value to achieve a well-balanced and diversified portfolio.

“Holding 2% to 10% in gold as part of a well-diversified portfolio can improve performance even more,” the market development organisation for the gold industry argues.

“Broadly speaking, the higher the risk in the portfolio – whether in terms of volatility, illiquidity or concentration of assets – the larger the required allocation to gold, within the range in consideration, to offset that risk,” WGC says.

The rich likes gold?

According to Attitudes Survey in the Knight Frank Wealth Report 2019, gold is among the assets preferred by the Asia’s rich, as they turn increasingly cautious over the prevailing economic climate this year. Besides gold, the wealthy in the region also seem to prefer to hold real estate and cash to maintain or grow their wealth portfolios.

“Amid a more cautious sentiment, the Attitudes Survey showed that Asia-Pacific’s ultra-high-net-worth individuals (UHNWIs) are expected to allocate more of their wealth to cash and less cyclical assets such as bonds and gold,” notes the survey, which is based on global responses provided by 600 private bankers and wealth advisers who between them manage over US$3 trillion of wealth for UHNWI clients.

To put that into perspective, the survey finds that UHNWIs in Asia are expected to increase their allocation to cash by 36% and gold by 20% in 2019. This is higher than the global average of 27% increased allocation for cash and 15% for gold.

Notably, it is the wealthy individuals in China and Malaysia who are flocking to gold within the region this year.

To that, UOB Malaysia head of private bank Dill Choo Chooi Lin explains gold is hugely popular as an investment, given it is typically viewed as a “safe haven” asset during times of uncertainty.

“With the US Federal Reserve (Fed) ending its current rising interest rate cycle, at least for the time being, there is renewed confidence in gold. However, it is important to note that like other markets, the gold market can be subject to speculation and volatility,” Choo says.

Meanwhile, Bain Partners & Management Ltd chief strategic advisor Dar Wong says investing in gold makes sense for Malaysians, as the precious metal could act as a hedge against the volatility of the ringgit, which has been weakening against the US dollar in recent years.

“Malaysians are encouraged to keep some funds in gold as safe haven as the ringgit is weak,” the Singapore-based analyst says in an email to StarBizweek.

Weak rebound

Generally perceived as a “safe haven” asset, gold benefited, as the US-China trade tension escalated over the week, resulting in traders switching out of riskier assets such as equities for less risky ones such as bonds and gold, among others.

The risk-off sentiment due to concerns over the potential impact of US-China trade war on global growth helped lift spot gold prices off its 2019 lows of around US$1,270 (RM5,273) an ounce early this month to trade above US$1,280 an ounce over the week.

Despite some support from the risk-averse markets amid the uncertainties over the outcome of the US-China trade talks, some analysts see gold facing strong resistance at the US$1,290 levels in the short term.

“We are not in the flight to safety or panic mode despite the risk-averse market we are seeing right now and that’s why we are not seeing gold prices rally,” DailyFX analyst David Song tells Reuters over the week.

Separately, Singapore-based Phillip Futures wrote in its report that the technical overview remains negative for gold for the current term, as evidenced by the precious metal struggling to hold bullish gains in recent days.

Spot gold prices at present are still trading some way off its year-to-date high.

Recall, the precious metal surged past US$1,346 an ounce to a 10-month high in late February, driven by uncertainty over the outlook for global economic growth and trade, ongoing equity market volatility, and indication of a slower pace of increase in interest rates by the Fed.

Interest-rate hikes work against gold, which is a non-interest-bearing asset. So, indication of a slower interest rate hike cycle eases the selling pressure on gold.

Price outlook

Still, there are some who are more optimistic in their outlook for gold.

Bain Partners’ Wong, for one, says spot gold prices could gain at least 10% by end-2019 to hit somewhere above US$1,400 an ounce.

“Gold (and silver) prices have been relatively flat to slightly negative in terms of gains, compared with crude oil prices that have risen more than 25%, so far this year. The main reason for this is the firm US dollar, which puts a lid on precious metals, while energy prices defy the inverse correlation (between the greenback and oil),” Wong explains.

“However, we do not foresee the US dollar remaining firm till year-end; we expect the US dollar bulls to take a breather over mid-year. Thus, there is potential to see price recovery in gold (as well as silver),” he says.Going beyond mid-year, Wong says, crude oil prices are expected to slow down in the uprun, while precious metals will catch up on the recovery.

Wong is not alone in expecting gold prices to surge past US$1,400 an ounce.

Eddie Nagao of Sumitomo Corp, for instance, had reportedly projected that gold prices could trade as high as US$1,475 an ounce by the end of this year. He expected gold to be one of the favoured asset classes among institutional and private investors, citing the Fed would not be able to hike interest rates as much as it would want, while the probability of a US recession in 2020 remained and the volatility of financial markets was expected to increase over the medium term.In his report last month, CIMB Research analyst Nigel Foo said gold prices were expected to find support between US$1,240 and US$1,260 an ounce. These levels would indicate a good opportunity to accumulate gold, he said, adding that his team was projecting gold prices to rally to the US$1,500 to US$1,600 levels over the next few quarters.

Those who favour gold argue that the precious metal helps preserve one’s wealth in tough times, as it tends to “outperform” other asset classes during downturns.

On top of that, they like gold’s ability in helping maintain one’s purchasing power from being eroded by inflation, besides offering good protection against currency depreciation.

However, not every financial adviser would advise his or her clients to put money in gold as long-term investment.

For instance, Excellentte Consultancy Sdn Bhd financial adviser Jeremy Tan argues that one needs to weigh the “downside” of gold investment before putting money in the precious metal.

“Gold is a commodity and it is not ‘productive’. It pays neither interests nor dividends,” Tan explains.

“Its value increases not so much due to economic activities or cycle. Most of the time, its value is based on the ‘fear’ factor, for example, in times of great uncertainty, especially during times of war,” he adds.

However, Tan says, he would recommend investing in stocks/shares of companies involved in activities related to the mining, refining and trading of gold, as a way to create a diversified portfolio by investing in different sectors.