Exclusive: Gold rush

A worker polishes gold bullion bars at the ABC Refinery in Sydney. Gold prices hit US$2,000 an ounce on markets for the first time on August 4, the latest surge in a commodity seen as a refuge amid economic uncertainty. — AFP

ONE of the savviest investors of all time, the sage of Omaha, Warren Buffett, has long been a de facto leader of the anti-gold investment crowd. His view is simply this: that gold is not a productive asset.

In Buffet’s opinion, gold is just a piece of lustrous storage space and racks up security fees.

This is because gold has no earnings and investing in gold does not offer dividends or interest payments in comparison to other safe-haven assets such as government bonds.

As a matter of fact, under the Islamic law, there is a tax obligation for holding a certain amount of gold.

With gold prices recently hitting an all-time high of US$2,070 per ounce on Aug 1, rising almost 30% this year alone, investors might wonder what is the gold rush about?

Shifts into gold-related investments by some investors have come about after the aggressive monetary easing by developed countries’ central banks, especially the US Federal Reserve’s massive bond-buying programmes and slashing of interest rates that have resulted in lower bond yields.

For instance, the benchmark 10-year US government bond yield is presently at around 0.64%.

Interestingly, on Aug 14, Buffet surprised the market after Berkshire Hathaway bought about 21 million shares of gold miner Barrick Gold, spending about US$563mil.

This is especially after he sold bank stocks namely Wells Fargo & Co and JPMorgan Chase & Co.

Notably, interest in gold had already started since last year even before the onset of the coronavirus pandemic. Investors had already begun worrying about inflationary pressures due to the intensifying trade war between two major economies, China and the US.

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However, it should be noted that Berkshire Hathaway’s recent investment is a small one and is in a gold mining company and not in gold itself. Furthermore, some analysts have theorised that Berkshire Hathaway’s investment was likely driven by the cash flow potential of Barrick Gold.

According to Habib Jewels Sdn Bhd executive chairman Datuk Seri Meer Sadik Habib, the price of gold has actually gone up more than 10 times its value over the last 20 years.

In other words, he said a kilo of gold worth about RM28,000 in 1996 is now worth almost RM280,000.

“Investors should have a long-term view when investing in gold.

“While gold is a non-yielding asset, it is historically used as a hedge against inflation to preserve wealth, ” Meer Sadik tells StarBizWeek.

Gold is also widely regarded as a “safe haven” in times of economic uncertainties and market volatility.

For instance, at times of uncertainties, currency devaluations and inflationary pressure could erode the value of investments but that doesn’t apply to gold due to its physical value and limited supply.

Meer Sadik expects that gold has room to run on the back of the low interest-rate environment, weakening in the US dollar, economic uncertainties from the Covid-19 fallout and the massive stimulus measures from the US Federal Reserve.

“The gold price had risen almost 18% last year due to the trade war between the US and China and another 30% this year.

“In response to the Covid-19 fallout, countries around the world took unprecedented stimulus measures that see more money coming into the system.

Meer Sadik: Investors should have a long-term view when investing in gold.

“With global interest rates at record low and quantitative easing from the developed economies such as the US, Europe and Japan to stimulate the economy, we expect gold price to remain high, ” he says.

In the local context, Meer Sadik says Malaysians buy gold for both adornment and investment.

He points out that buying has been embedded in our culture “to keep your money in gold” instead of holding cash.

“For years, our forefathers gave their money to their wives to manage and in turn their wives would buy gold instead of holding cash. In the long term, gold prices will always be on an upward trend.

“I would say women have been doing a great job in preserving wealth, ” he quips.

He points out that of late, interest in gold has been increasing and that is reflected in increased sales at some of Habib Jewel stores.

Meer Sadik adds that the low interest-rate environment is attracting more people to invest in gold.

In addition, less travelling activity and the six-month loan moratorium period has increased the cash in hand for people to invest in gold.

Referring to the recent investment made by Buffett, Meer Sadik says Berkshire Hathaway’s investment in a gold mining company came at a time when gold was trading at an all-time high.

“The investment could be small in comparison to the whole fund size of Berkshire Hathaway but it is something to look into, especially as Buffett is known for his prowess in value investing by taking a long-term view, ” he says.

When asked about the recent drop in gold prices, Meer Sadik says that price correction is expected as price has rallied lately. After touching its all-time high of US$2,070 an ounce in the beginning of July, gold prices have retrieved to around US$1,900 an ounce presently.

Gold rush to continue

Some quarters estimate that the price of gold could go above US$2,000 an ounce. Kumpulan Sentiasa Cemerlang fund manager Yeoh Keat Seng expects gold prices to remain high as long as uncertainties in the market remain, especially on how the economy is going to recover from the Covid-19 fallout.

Any potential further weakening in the US dollar would also support the gold price, moving forward.

“Gold usually performs inversely to interest rates and the US dollar, ” he says.

He points out that in the current situation where bond yields are lower, investors are becoming more risk-averse and would seek safe-haven investments such as gold.

“When interest rates are low, it is less expensive to hold gold, ” Yeoh adds.

While he acknowledges that gold has no real intrinsic value like bonds and stocks, investors tend to seek gold as a safe-haven asset at times of uncertainties.

When asked about the difference between investing in real physical gold or in gold-related products such as exchange-traded funds (ETF), Yeoh says investment in the latter gives more flexibility to investors.

“The spread of buying and selling an ETF is smaller than buying physical gold at the store and buying physical gold is usually more lumpy, ” he explains.

A high spread means there is a large difference between the bid and the asking price.

One of the most notable ETFs is the SPDR-Gold Shares (GLD), which owns physical bullion rather than just financial derivatives.

Since early July, this ETF has gone up more than 15%. Year-to-date, it is up 35%.

According to the Financial Times, SPDR has become one of the world’s biggest owners of gold, surpassing even the central banks of Japan and India.

The size of the fund’s holdings – which are held in HSBC’s London vaults – has climbed to 1,258 tonnes of gold.

GLD is now the world’s sixth-largest ETF, with more than US$79bil in assets under management.

According to the Financial Times, quoting the World Gold Council, investors stashed a net amount of US$7.4bil in cash into gold-backed ETFs last month.

In Malaysia, a gold ETF called TradePlus Syariah Gold Tracker, which is the country’s first syariah-compliant commodity ETF, has rallied more than 32% this year.

Is gold too expensive?

Although gold prices have reached new highs, some analysts see further upside for the precious metal.

For instance, Schroder Investment Management argues that gold and gold ETFs in particular are signalling that this rally cycle has a lot further to run.

“Against a backdrop of record-high global debt, we believe we are moving through a major epoch-change in global macro policy towards a much greater acceptance of inflationary outcomes.

“The result is likely to be more deeply negative real interest rates and greater risk of broad currency debasement. In this environment, continued increases in gold allocations could have extraordinary impacts on aggregate private gold holdings.

“We don’t see why gold prices should be somehow capped at current levels at all in such an environment, ” it says in a recent report.

Schroder says that for gold producers, current operating conditions are exceptionally good and again stand in stark contrast to 2011, when gold reached its then-record high of US$1,922 an ounce.

It points out that on the revenue side, gold prices are being driven by understandably strong demand for gold as a monetary hedge.

“Meanwhile, operating costs remain broadly under control and management attitudes to large-scale capital spending remain conservative. This is leading to both record operating margins and record forecast free-cash flow generation, which is likely to trigger material increases in distributions to shareholders, ” it says.

This brings us back to Buffett’s recent investment. It is worth stressing that Berkshire Hathaway has not bought gold.

It has bought shares in a dividend-paying gold-mining company which is churning out handsome cash flow, thanks to the jump in gold prices by 30% this year.

Also, Berkshire Hathaway’s position in Barrick Gold is relatively small to its total fund size.

Back at home, some gold-related counters including jewellers such as Poh Kong Holdings Bhd and Tomei Consolidated Bhd have benefitted from the surge in gold prices.

Both companies have seen their share prices rise to multi-year highs.

The gold rush has also seen investors scouting for other smallish gold-related stocks such as Borneo Oil Bhd and MUI Properties Bhd and that led to frenzied trading in their share prices earlier this month. Both have issued reports about the potential from their gold mining activities.

Little-known loss making jewellery company Niche Capital Emas jumped more than 500% this month alone. However, it is yet known if the gold rush will lead to bumper earnings from these companies considering that they are at various stages of operations related to gold. Investors, for example, ought to understand the full viability of the gold mining activities as past examples have shown that this is not necessarily a lucrative endeavour for all players.