Has gold lost its lustre as an asset class?


DESPITE rising inflation stemming from pandemic-related disruptions, gold has not gotten a shot in the arm this year, with investors eyeing moves into other asset classes.

Prices of the yellow metal have been volatile this year.

Two key factors driving the volatility of gold prices is the recovery of the global economy from the fallout of Covid-19, as well as a surge in treasury yields.

It is important to note that investors have traditionally seen gold as an excellent hedge against inflation and other uncertainties over the last five decades. The price of gold tends to rise with an increase in the cost of living.

And gold has been touted to deliver higher-than-inflation returns over the longer term compared with other asset classes. But the bullion appears to be less in favour due to an increased risk appetite fuelled by fiscal stimulus programmes worldwide.

Interestingly, stocks and even cryptocurrencies such as bitcoin are now better positioned to hedge against long-term inflation for investors, notes Anthony Dass, (pic below)who is the chief economist of AmBank Group.

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With the tide turning with many younger investors opting for digital assets over metals, Dass says circumstantial evidence reveals that some money has flowed directly from gold into bitcoin.

“Even institutional investors appear to be making a decision to allocate some money to bitcoin as a hedge against a fiat collapse. Bitcoin’s performance over the last year is directly aligned to the movement in bond yields. When yields rise, so does bitcoin.

“This implies that the digital currency benefits directly from the ‘reflation trade’ – or the belief that inflation is coming,” he tells StarBizWeek.

However, Dass stresses that the drawback of investing in bitcoin is that its decline tends to be three-times bigger and the risk can be equalised by holding three times as much gold as bitcoin.

“Official action might easily limit the use of the digital asset if it grows big enough,” he cautions.

Apart from cryptocurrencies, carefully selected stocks can also help investors protect themselves against long-term inflation.

“Stocks have produced the highest inflation-adjusted return of any major asset class over the long term,” points out Dass.

That said, gold is still pursued by some as a hedging asset.

With inflation surging to its highest annual pace in three decades last month, gold prices climbed near their highest level in five months early this week.

On Nov 18, gold futures eased 0.37% to US$1,863.40 (RM7,783.42) per ounce.

Should inflationary pressures persist longer, Dass says investors would be seeking for inflation hedges, adding that gold still has the intrinsic value touted to be the best hedge against inflation in times of stress.

As such, he forecasts gold prices to hover around the US$1,800 (RM7,527) per ounce level over the next six months, still higher than the pre-pandemic level.

Key factors such as uncertainties surrounding the pandemic coupled with the impact on the pace of the recovery in global economy would also support gold prices moving forward.

As such, dealers estimate gold prices to maintain the level around the current price for the next one year.

For next year, Phillip Futures Sdn Bhd dealers Ting Mee Yi and Ong Su Ling foresee gold prices to hover between US$1,800 (RM7,527) to US$1,815 (RM7,589) per ounce.

“The current rise of the Delta variant has already weakened the efficiency of the vaccines. Further, there are many still unvaccinated people in less economically developed countries with other variants that could develop further potential risks next year.

“Many central banks have started to buy more gold reserves again to protect their wealth, especially after the pause in 2020 to respond to the Covid-19 pandemic.

“If this continues in the following months, it will keep the demand higher and maintain the support for gold prices next year,” estimate Ting and Ong.

When asked about a major correction in gold prices, Ong believes that prices of the precious yellow metal would unlikely drop before mid-next year, unless there is a surprise move by the US Federal Reserve (Fed) on its monetary policy.

Notably, gold prices have surged since the beginning of this month following an indication by the Fed that it would be patient on raising interest rates.

Similarly, the Bank of England has also kept interest rates on hold since its announcement early this month.

Certainly, a Fed rate hike would dull the bullion’s appeal.

However, Ting doubts that the Fed would raise interest rates in the short term, as the central bank is likely to further monitor the labour market.

“We shall monitor closely the next Fed meeting on Dec 14-15 for more clues.

“If there are hawkish comments on a rate hike, the gold price will drop as it turns less competitive from higher-yielding investments,” she reckons.

Early this month, Fed chair Jerome Powell disclosed that the planned pace of tapering would put it on track to wrap the process up by mid-2022, but it could be sped up or slowed down depending on the economic outlook.

A correction in gold prices would occur only when the US exercises continual tapering programmes which make the dollar stronger against the European markets, says ALA Advisors chief investment officer Dar Wong.

“Besides such fundamental corrections, we should expect technical corrections from time to time,” he says.

As market analysts estimate a high probability of a Fed rate hike in the second quarter of next year, Wong estimates the yellow metal price to stay firm as a safe haven for the next four months.

“However, be prepared for any unexpected changes in case the US government reaches another fiscal cliff in the middle of next year, while the European Central Bank will also exhaust its ¤1.9 trillion (RM9.02 trillion) stimulus some time in March next year,” he cautions.

The European central bank had earlier allocated ¤1.9 trillion (RM9.02 trillion) to fight the effects of the pandemic and keep borrowing costs low.

With dealers and economists holding a strong belief that gold is a good asset class to hedge against the shocks in the equity, bond and oil markets, there lies a wide range of exposure to gold for investors.

The best avenues for investors to gain exposure to gold is via the digital route, including investments in digital gold, gold exchange-traded funds (ETFs), gold mutual funds and sovereign gold bonds.

“Digital gold can be purchased through various apps in denominations starting from one gram onwards,” says Dass.

For long-term investors, Dass suggests sovereign gold bonds as the most suitable choice of investment beyond five years.

“Not only will you receive regular interest payouts while you stay invested, but you will also have the option of making tax-free redemptions after staying invested for at least five years,” he says.

Although investors can also opt to invest in gold in the physical form of jewellery, coins and even bars, Dass cautions that there are key limitations of investing in physical gold.

He warns that design charges will make purchase expensive, rack up storage expenses and make it inconvenient to sell due to possible impurities and the requirement of origination and purity certificates.

On the local front, gold-related counters such as Poh Kong Holdings Bhd and Tomei Consolidated Bhd have not benefitted from the surge in gold prices this month.

Yesterday, Poh Kong’s share price closed 1.2% lower to 81 sen, while Tomei’s share price was down 1% to 96.5 sen.

Given the wide range of investments for investors to choose from, Ting and Ong advise investors to build a diversified portfolio of investments.

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