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Gold regains its glitter

Asia Analytica
Asia Analytica • 8 min read
Gold regains its glitter
Gold has been a traditional store of value and hedge against inflation as well as economic-geopolitical uncertainties for thousands of years — and a strategic asset in many diversified portfolios, including those of central banks.
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Gold has performed very well as part of the broad-based global assets rally, rising as much as 36.4% this year, outperforming the Standard & Poor’s 500 index as well as the tech-heavy Nasdaq Composite index.

This month, the price of gold breached the US$2,000-an-ounce milestone for the first time ever, though prices have fallen back a little since. Does this gold rally have legs?

We think so. Just as we thought the US dollar could be looking at a multi-year downtrend, gold could be on a multi-year uptrend. As we discussed last week, gold, like many globally traded commodities, is denominated in US dollars. As such, weakness in the US dollar is one supportive factor for higher gold prices.

A larger factor would be expectations that interest rates globally will remain very low for an extended period of time. The world is in the deepest recession since World War II and will be heavily reliant on expansionary fiscal and monetary stimulus for some time.

The US Federal Reserve has indicated that it will not even consider raising rates from the current near-zero level until 2022 and is prepared to tolerate inflation exceeding its 2% target.

Real yields on the benchmark Treasury have fallen into negative territory. And the pile of negative yielding sovereign debt is rising anew, totalling more than US$16 trillion ($21.9 trillion) and nearing the peak from a year ago.

What this means is that holding gold now carries no opportunity cost, making it an attractive safe haven asset for those worried about rising global indebtedness and fiat money debasement on the back of massive fiscal spending and unprecedented monetary policies.

Gold has been a traditional store of value and hedge against inflation as well as economic-geopolitical uncertainties for thousands of years — and a strategic asset in many diversified portfolios, including those of central banks.

Looking back at the gold rallies of yesteryears, the current uptrend, which began in late 2015, has been relatively mild and barely five years old. The immediate preceding bull market had lasted for more than a decade, while others have seen much steeper gains (see Chart 1).

In short, we think investing in gold is still a positive risk-reward proposition at this point. But not all that glitters is gold. Specifically, some of the gold-related stocks on Bursa Malaysia that have seen frenzied trading and steep price gains are, we believe, poor proxies.

For example, jeweller companies such as Tomei Consolidated and Poh Kong Holdings may see one-off gains on their inventories, but earnings are dependent on demand and sales, which are unlikely to fare well in the prevailing economic times.

Case in point: Demand for physical gold in key markets India and China has fallen sharply as gold prices surged. Moreover, consumer traffic is significantly reduced these days in shopping malls; and weddings and other celebrations in which gold is traditionally given as gifts are being curtailed.

In fact, buying gold jewellery is far from the best option as an investment, given that losses on reselling could be as high as 25% to 35% — for workmanship, wastage, purity issues, overheads, middleman profits and so on.

You would be much better off investing through a gold bank account (see table). The spreads range from as low as 1.5% to as high as 5%. Buying and selling is convenient and, best of all, you have no risk of getting robbed.

For even easier and cheaper trading, there is the TradePlus Shariah Gold Tracker, an exchange-traded fund (ETF) listed on Bursa Malaysia. The fund’s net asset value is backed by physical gold bars and published daily. It is currently trading at RM2.61 a unit (at time of writing) and the minimum purchase/sell is the typical board lot of 100 units.

There are also numerous gold ETFs listed on the New York Stock Exchange-Nasdaq, where prices mirror the movement in gold bullion prices. The SPDR Gold Trust ETF is the largest and most popular, with highest liquidity. This ETF is also traded on the Singapore Exchange. Others such as the iShares Gold Trust ETF, SPDR Gold MiniShares Trust and Aberdeen Standard Gold ETF Trust have smaller assets under management but lower annual fees.

And then there are gold miner ETFs — where the underlying assets are stocks in gold mining companies — such as the VanEck Vectors Gold Miners ETF and VanEck Vectors Junior Gold Miners ETF.

Gold miner ETFs tend to be more volatile than their pure-play commodity cousins. They can outperform — miners enjoy outsized margins and profits when gold prices are rising, given their relatively fixed overheads — but also underperform in a broad-based selloff, being exposed to volatilities in both the commodity and equity markets.

That said, they are less risky investments than individual mining companies with their idiosyncrasies. For instance, we see the recent run-up in shares in Bahvest Resources and Borneo Oil on Bursa Malaysia as highly speculative. The latter rallied after announcing that it found 22,200 ounces of gold deposits in one of its mining plots. There are no details on its commercial viability for extraction or profitability. In the absence of actual production, the company would not be able to capitalise on the current gold rally. Borneo Oil has been loss-making in the last two financial years and barely profitable in the first three quarters of the current FY.

There is certainly no shortage of what appears to be prime cases of irrational exuberance in the stock market these days — where investors chase the hottest themes, often without regard to underlying fundamentals and, at times, even common sense.

Some weeks back, we wrote about how analysts have been raising their target prices to keep pace with the record-breaking price gains for glove maker stocks. We noted yet another analyst joining the race to shock with a new eye-watering market capitalisation target for Top Glove Corp, at RM77.60 a share under its bull-case valuation … though we are more inclined to call it a “bulls**t” valuation.

At this market cap of almost RM210 billion ($68.7 billion), Top Glove will be the largest listed company in both Malaysia and Singapore. Yes, it will dwarf Malayan Banking and will be bigger than DBS Group Holdings and Prudential.

The frenzied speculation and exuberance is spilling over into the Singapore stock market as well. Last week, property company Aspen (Group) Holdings announced its intention to diversify into glove manufacturing via a proposed joint venture with businessmen Chua Ma Yu and Iskandar Basha Abdul Kadir.

The proposal is subject to shareholder approval at an extraordinary general meeting, to be convened at a date as yet undetermined. Meanwhile, it has signed a right of first refusal to lease land in Kulim Technology Park for the venture.

Aspen’s share price jumped 168% to 15 cents on Aug 13, from 5.6 cents, on the highest traded volume in more than two years (see Chart 2). If the announcement is an effort to capitalise on prevailing exuberance and generate stock market interest, it was, without doubt, a resounding success.

Yes, you read right: an announcement to call for an EGM at a yet-to-be-determined date, on a proposal to start a new business venture into rubber gloves, on a land yet to be bought, with a partner with no relevant experience. And the stock price shot up 168%, for a stock that has hardly traded.

Stocks in the Global Portfolio had a mixed week. The portfolio ended marginally lower for the week ended Aug 13. Total portfolio returns now stand at 29% since inception. This portfolio is outperforming the benchmark MSCI World Net Return index, which is up 19.5% over the same period.

Builders FirstSource was the biggest gainer, its shares up 14.4%. BMC Stock Holdings also had a good week, rising 10.3%; and Home Depot gained 5.3%. Qualcomm added to recent gains by closing 4% higher.

On the other hand, shares in Alibaba Group Holding ended 3.7% lower, whereas ServiceNow and Taiwan Semiconductor Manufacturing Co lost 2% and 2.7% respectively last week.

We added 3,300 shares in Telefonaktiebolaget LM Ericsson, better known as Ericsson. With this latest addition, the Global Portfolio is, once again, near fully invested.

In terms of overall strategy, we will keep the portfolio fully invested and are looking to switch into more cyclical stocks. We will discuss our rationale further next week.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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