Gold rally may be faltering


  • Gold
  • Wednesday, 03 Jul 2019

PETALING JAYA: With uncertainty from the US-China trade war starting to taper, the rally in gold may be faltering as investors abandon the safe haven and move back to ‘riskier assets’.

Gold reached a six-year high on June 25, achieving US$1,422.85 (RM5,889) per ounce. This was on the back of the Federal Reserve signalling a possible cut in interest rates as soon as July, which, in turn, sent the US dollar lower and gave gold prices a lift.

On Monday, gold fell back below US$1,400. It ended yesterday at US1,392.44 as of press time.

Over in Europe, the European Central Bank also indicated that it could restart quantitative easing following. Together with tensions from the China- US trade war and rising geopolitical tensions, investor demand for the precious metal soared as they moved to safer assets.

Now, for anyone who has invested in gold over the last ten years, returns have been paltry. Equities have significantly outperformed gold.

Over that time period, gold has appreciated by 53% while the Dow Jones Industrial Average has charged by 207%.

There were a few brief spikes during that time. It did attempt to break the US$1,900 level between 2011 and 2013, but that sank back to the US$1,100 level in 2013. Since then, gold has more or less been moving sideways.

Based on these figures, gold’s return is nothing special considering equities did so much better over the same time period.

“My opinion is that gold has reached its upper limit for now. Investors are likely to sell into strength now that gold has broken its resistance target of US$1,350,” said one commodity dealer.

He added that besides gold’s safe haven status, there was actually little fundamental reasons propelling gold prices forward. Beyond its pretty looks, gold functionally has limited industrial usage.

“I think the best of gold’s price action is now behind us. The external economy wasn’t looking good in the last two months, and not surprisingly, we saw investors flock into gold. We saw a sharp rise in gold’s price – from US$1,278 in early May, to its high of US$1,414 on June 25. That is already a 10% jump,” said the dealer.

In general, the benefits of gold investing are well documented. It is seen to be safer and more stable for long-term investment. It is also liquid, its a hedge against inflation, there are supposedly low volatility swings, it’s a safe haven and it’s part of a balanced investment portfolio.

“If gold were indeed a viable long-term investment, well it should have performed that way over the long term. If it does not beat stocks, at least come close. You would think, especially given all the talk of gold and rates being connected, it would beat bonds, too. Yet (as the chart shows), it hasn’t,” said Fisher MarketMinder in its note on June 26.

“Since gold began trading freely at the end of 1974, stocks have lapped it repeatedly. US bonds’ total return since the end of 1975, when our bond data began, had more than doubled gold’s. Call us crazy, but we fail to see the point of owning gold as an investment,” added Fisher MarketMinder.


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