Investors returning to gold as safe haven

PETALING JAYA: Investors are resorting to gold as a safe haven given the looming uncertainties in the global markets.

For gold price to dissociate from the US dollar, interest rates and move sustainably higher, the market needs to question the US Federal Reserve’s (Fed) commitment in meeting its inflation target, according to SPI Asset Management managing director Stephen Innes,

“If the US economy continues to be hit by stagflation shocks, the cost of bringing inflation back to 2% may prove too high.But this is, however, not the base case currently,” he told StarBiz.

At press time, the precious metal was edging towards US$2,050 (RM9,058) level, trading at US$2,044.52 (RM9,032).

A check on the price chart showed that gold peaked to US$2,052 (RM9,067) on March 8, 2022 but it dropped to slightly the US$1,600 (RM7,068) levels in October last year.

Meanwhile, Tradeview Capital chief investment officer Nixon Wong attributed the recent outperformance of gold to the speculation that the US interest rate hike cycle is peaking, which could potentially weigh on the US dollar strength in the near term.

“This has led to investors to purchase gold as a hedging strategy for the weak US dollar,” Wong explained.

However, he said other factors including interest rates, inflation data, geopolitical events and market sentiment would also influence the price movement of gold.

Wong expects it to remain elevated at least for the second quarter of this year since expectations on the Fed pivoting is higher.

“I think investors will likely to continue holding gold-related counters at least in the near term, while monitoring the situation and policies in the United States,” he said.

Innes said for investors speculating that a recession is likely to occur, gold may be an attractive investment option.

“In a high-inflation environment, gold tends to increase if the central bank is more focused on growth, and falls if the central bank is focused primarily on the inflation fight,” he added.

If the US economy experiences a soft landing, there is a risk for the price of gold to decrease by up to 10%.

In contrast, should the US economy goes into a recession, there may be a potential upside of up to 30%.

According to Innes, SPI Asset Management has 20% of its total assets under management (AUM) invested in gold.

However, due to the initiation of quantitative easing in 2020, SPI Asset Management increased its allocation to gold to 25% of its AUM, and subsequently owing to the Russia-Ukraine crisis, allocation to gold rose to 30%.

“We are at the levels, where gold-producing countries can start selling, and we expect gold to settle at around US$2,050 (RM9,058) by year-end.

“Hence, we think emerging countries which have been big buyers will stop for a while,” he noted.

Wong said having gold in a portfolio could be a strategy for diversification and risk management.

“Gold has a low correlation with other assets such as stocks and bonds. This means that including gold in a portfolio can help reduce overall portfolio risk and volatility.

“However, gold is still a commodity, and price movements are cyclical in nature, influenced by various macro-related factors. Therefore, it is only a hedging tool for short-term inflation, currency, and interest rate risks.

“It is not recommended to hold gold securities as a long-term investment due to potential changes in economic conditions and global economic policies,” added Wong.

He suggested that investors consider some yield instruments such as bonds and high dividend yielding stocks as alternatives.

Meanwhile, gold players on Bursa Malaysia have been performing well this year, in line with the price of the precious metal.

Year-to-date, Poh Kong Holdings Bhd has increased by about 15% to 98 sen, Tomei Consolidated Bhd up 28% to RM1.36 and YX Precious Metal Bhd rose 36% to 34 sen respectively.

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