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Golden opportunity

Khairani Afifi Noordin
Khairani Afifi Noordin • 16 min read
Golden opportunity
The yellow metal may be able to break its previous all-time high of US$2,075 per ounce recorded in August 2020, analysts say. Photo: Bloomberg
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The yellow metal is soaring to record highs with favourable market dynamics. Experts foresee further upside potential.

Coming off from a high of over US$2,000 ($2,689) per ounce last recorded in February last year, gold eventually tumbled to US$1,616 per ounce in November. This was on the back of global commodity shortages, heightened inflation, aggressive monetary tightening, as well as enhanced appeal of the US dollar.

Heading into this year, the yellow metal continues to sparkle. Along with the last four consecutive 75 basis point hikes delivered by the US Federal Reserve, 2023 has seen hopes of monetary easing which have revived investors’ interest in gold. This, coupled with the banking crisis looming over the US economy, has spurred investors seeking a safe haven to snap up the precious metal.

As a result, gold made an impressive run of around 25% from its 52-week low in November 2022 to its recent top in May 2023 in six months. As the prospects for gold continue to be bright with several tailwinds in the second half of the year, the yellow metal may be able to break its previous all-time high of US$2,075 per ounce recorded in August 2020, analysts say.

Gold is one of the best-performing asset classes year-to-date (ytd), points out Robin Tsui, gold exchange-traded funds (ETF) strategist at State Street Global Advisors. Performing on a par with equities, the bullion had beaten other safe-haven asset classes, such as global bonds and US dollar. The precious metal started the year at around US$1,823 per ounce, before rallying to US$2,050 per ounce on May 3, a 12% increase ytd.

See also: Gold hits fresh record as Fed rate-cut optimism fuels demand

However, gold failed to hold above the zone as the US debt default deal materialised and neutralised any potential threats to the world’s largest economy, while the mixed US jobs report increased uncertainty over the Fed’s rate policy, says Phillip Nova market analyst Priyanka Sachdeva.

“As long as gold sustains above the 100-day moving average of US$1,944 per ounce, a rebound towards US$1,980 may be witnessed. Strong consolidation above US$1,980 may instigate an upward momentum attracting bulls for a retest of US$2,000 per ounce. On the other hand, any further upside in the US dollar or shift in Fed’s stance back to monetary tightening may swing gold on the downside,” says Sachdeva.

Over the past couple of weeks, gold broadly stayed in a range bound between US$1,960 and US$1,990. In the short term, gold would need a stronger catalyst to significantly sustain its upward momentum, Sachdeva adds.

See also: Gold seen hitting US$3,000 at Citi as investor inflows juice rally

Price supporters

Moving towards the second half of the year, there are three main themes that will support gold’s performance, says State Street’s Tsui. The first is the Fed’s rate hike pause — the Federal Open Market Committee, following its mid-June meeting, called the first “hold” on rate hikes since February 2022. This would be beneficial for gold, as rising interest rates tend to be negative for the yellow metal.

The second theme is the weakening US dollar — traditionally, there is a strong negative correlation between the US dollar and gold. The US dollar hit its highest level since November 2022 in early March this year, before the banking crisis fears in the US triggered a sharp reversal. As at June 12, the US Dollar Index is down 1.34% over the past 12 months.

The US dollar is expected to continue softening in the coming months, amid the Fed pause and tightening monetary policy by major central banks which diminishes the greenback’s advantages. Swiss National Bank vice chairman Martin Schlegel, for instance, has said recently that the central bank is ready to tighten its monetary policy to combat inflationary pressure which it sees spreading across the Swiss economy.

The last theme that would support gold is the possibility of a US recession, as the bullion has historically outperformed before and during recessions. In fact, gold performed well during the height of the Covid-

19 pandemic and European debt crisis, Tsui points out.

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There are differing house views among different firms on the possibility of a US recession. Eastspring Investments, for one, expects the US recession to potentially take place in the next six to 12 months as the US economy absorbs the full impact of the Fed’s tightening. This has been further exacerbated by the recent volatility in the US banking system. That said, the firm expects any recession to be shallow as household and non-financial corporations’ balance sheets remain relatively healthy.

Standard Chartered wealth management’s chief investment office sees more than 70% probability of a US recession around the end of the year. The bank expects the 500 basis points of Fed policy tightening over the past year to impact growth with a lag by the end of the year, leading to a softening of the job market. It also expects the Fed to start cutting rates modestly in the fourth quarter of the year once the unemployment rate possibly rises past 4%.

“In times of uncertainties, especially when investors have lost confidence in risky assets, gold has historically proved to be a perfect hedge against inflation and will prove no different this time around. While the timeline of the Fed’s pivot is still uncertain, it’s hovering somewhere on the horizon and the reduced appeal of the US dollar will instigate a switch towards safe-haven gold,” Phillip Nova’s Sachdeva says.

To reach a new high, gold will have to prove strong bullish momentum sustaining significantly over the US$2,000 per ounce mark, which should coincide with catalysts like the Fed’s pivot and Western economic weakening by year-end, says Sachdeva. Clearer signs of these economies entering a recession will be an added boost, although under ongoing deterioration, it would not be unrealistic to forecast gold hovering around the US$2,000 per ounce levels by the end of the year, she adds.

Meanwhile, analysts at BMI Research have been neutral to bullish towards gold prices since 4QFY2022, and remain so for the months ahead. They believe the nearing of the end to the Fed’s hiking cycle and the mounting of global financial instability are likely to drive gold towards its all-time high of US$2,075 per ounce in the coming months, although there is significant resistance around that level as the US dollar remains strong.

The base case for gold for State Street’s Tsui is for it to trade between US$1,900 and US$2,100 per ounce by end-2023. If certain scenarios play out, such as heightened recession, ongoing Fed rate pause and weakening dollar, gold can break above its past all-time high of US$2,075 to trade between US$2,100 and US$2,300 in the second half of the year.

SPI Asset Management managing partner Stephen Innes, however, has a contradictory view. He believes gold has lost the recession lustre following the US economy’s continual surprise to the upside. Since the Fed has left interest rates on hold, investors continue to price in a high probability of a July hike, which is bearish on the margin.

“The dynamics from here get a bit more interesting as beyond the next few meetings, the rate cuts could be hard to dislodge given investors have very strong recession priors. This means cut pricing will simply be deferred rather than materially reduced, where stronger data will show up in further inversion. I think that could keep gold alive and the dollar from going on a bigger bull run, all things being equal,” says Innes.

The analyst still expects gold to trade closer to US$2,000 than US$1,900 per ounce by year-end. Now, if the Fed can “miraculously” engineer a soft landing, then gold could move down to US$1,850 per ounce, he says.

Fundamental drivers

There are also fundamental strengths that support the price of gold moving forward such as the resurgence in Chinese consumer demand as well as continued momentum in central bank buying, says World Gold Council (WGC) chief market strategist John Reade.

Based on the WGC’s data, Chinese consumers bought 198 tonnes of gold jewellery in 1Q2023, 41% of the global total. This was the highest first quarter for Chinese jewellery demand since 2015 following the end of zero-Covid-19 policies. “There was a strong bounce in jewellery, bar and coin investment demand out of China in the first quarter. However, I am a bit concerned that the slowing of the Chinese economy may see the rebound falter,” says Reade.

Demand from central banks experienced significant growth in 1Q2023 as official sector institutions remained keen and committed buyers of gold. WGC’s data shows that these institutions added 228 tonnes to global reserves in the first quarter of the year. The Monetary Authority of Singapore (MAS) was the largest single buyer during the quarter, adding 69 tonnes of gold in 1Q2023 — the first increase in its gold reserves since June 2021. The MAS’s gold reserves now total 222 tonnes, 45% higher than at the end of 2022.

Through its 2023 Central Bank Gold Reserves survey, the WGC found that 24% of central bank respondents intend to increase their gold reserves in the next 12 months. The planned purchases are motivated by increased buying of domestic gold production, rebalancing to a more preferred strategic level of gold holdings and financial market concerns, including higher crisis risks and rising inflation.

Still, it is not all sunshine — central bank gold reserves declined by 71 tonnes in April, primarily due to Turkish selling of 81 tonnes. WGC’s Reade says Turkey is a big component of the international gold market, with its central bank buying gold every quarter for the past several years, aside from the demand from its residents for gold investments and jewellery. According to the Gold Nations research by insights platform Forex Suggest, Turkey is the fourth largest gold nation in the world behind the US, Germany and Switzerland.

The country’s economy has been under pressure over the past few years due to its excessive current account deficit coupled with large amounts of private foreign currency-denominated debt, further exacerbated by its President Recep Tayyip Erdogan’s interest rate policy ideas.

“In the run-up to the election in Turkey, the government has been putting pressure on the domestic and commercial banks to prevent the currency from falling fast. Turkish investors and consumers recognise this, leading to extraordinary purchases of gold in the first quarter. These purchases appear to have dramatically accelerated in the second quarter.

“In order to fulfil that demand, the Turkish central bank has been releasing gold from its own reserves, selling gold to commercial banks to allow domestic investors and savers to buy gold. On the one hand, this results in a very positive bar and on coin demand from individuals. On the other hand, this has tipped the global reported central-bank activity into a net sale in April,” Reade says.

He notes that the outlook for Turkey’s gold demand remains uncertain. The currency has weakened significantly, while the re-elected Erdogan is expected to appoint more conventional finance ministers and central bank governors, which may calm the economic situation. At the same time, there is also potential for the extraordinary demand for gold bars and coins from Turkish residents to stay longer, as they look to protect themselves from currency and economic weakness. The Turkish lira is trading at a historic low against the US dollar, down over 25% ytd.

Moving forward, Reade points out that one of the strong stories over the past nine months has been the robust central bank buying. However, the Turkish central bank’s aggressive selling may weaken this narrative. “I think Turkey is an isolated case — it is certainly following very unique financial management of their economy. I don’t think that this is a sign that central banks are going to suddenly buy much less gold and even turn sellers. But people could interpret the data that way and there is the potential for that to damage the sentiment towards gold,” he adds.

Central banks and investors of gold have to take into account the influence of geopolitics, which is casting its darkest shadow in recent memories. As a result, gold prices, even at current lofty levels, are seen to go higher, says Alexandre Tavazzi, head of CIO office and macro research at Pictet Wealth Management.

He says central banks today are increasingly confronted with this question: do they want to continue to hold their reserves in the dollar, or should they diversify into other currencies? After the Russia-Ukraine war broke out, the European Central Bank and the Fed cut Russia’s access to their euro and dollar reserves. This has spooked other countries to worry if they too would suffer from similar sanctions one day.

One way for central banks to diversify their reserves, besides holding other currencies — of which there are not many attractive alternatives — is to hold more physical gold as a store of wealth. Tavazzi recalls that there was a “huge” buy in gold last December by a central bank that remains unknown to most.

By extension, Tavazzi recommends investors should hold some gold in their portfolio as a hedge. He adds that this asset has to be owned in its physical form that the investors can actually hold and own, and not substitutes such as certificates. “If you think about the banking crisis that is happening in the US, if you hold gold physically, it is one of the very few financial assets where you do not depend on anyone’s capability to pay you. Because it’s yours. It’s physical, right?”

In any case, the US is not refrained from acting on gold-related activities. On June 27, the US Treasury Department announced sanctions on four companies involved in “illicit gold dealings” to help fund Russian mercenaries, the Wagner Group. The four companies are in Russia, the United Arab Emirates and the Central African Republic.

Diversification benefits

With all the moving parts in the second half of the year, should investors still hold gold in their portfolios? Even if the prices cool down slightly following another rate hike, its appeal as a medium to diversify portfolios and hedge against other markets, as well as inflation, can still be useful for investors’ long-term plan, says Phillip Nova’s Sachdeva.

WGC data shows that the price of gold in US dollars has increased by nearly 8% per year since 1971 when the US gold standard collapsed. From Dec 31, 2002 to Dec 31, 2022, gold’s long-term return is comparable to equities and higher than bonds. The yellow metal has also outperformed many other major asset classes over the past three, five, 10 and 20 years.

Additionally, gold boasts a deeper and more liquid market compared to several major financial markets, including euro/yen and the Dow Jones Industrial Average, while trading volumes are similar to those of US one- to three-year Treasuries and US Treasury Bills among primary dealers.

Gold trading volumes averaged approximately US$132 billion per day in 2022. During that period, over-the-counter spot and derivatives contracts accounted for US$78 billion and gold futures traded US$52 billion per day across various global exchanges. Physically-backed gold ETFs offer an added source of liquidity, with global gold ETFs trading an average of US$2.3 billion per day.

In terms of how to invest in gold, the best way would ultimately depend on investors’ goals and risk tolerance, says Phillip Nova investment analyst Danish Lim.

He points out that as at May 9, the Gold Futures August Comex contract is still holding an 8.39% year-to-date gain around the US$1,980 per ounce level, after retreating from a recent top of US$2,085.40 per ounce. Meanwhile, the SPDR Gold Shares ETF returned 7.6% year-to-date, while shares of New York Stock Exchange-listed gold miner Barrick Gold are down slightly by 0.17% year-to-date, although total return is 1.05% year-to-date, supported by a 12-month dividend yield of 3.21%.

Gold bullion, for one, gives investors full tangible ownership of gold at the cost of additional expenses such as storage costs and sometimes premiums over the spot price. It also does not generate dividend income. However, physical gold does have the advantage of being free of counterparty risk as the investor fully owns the asset.

Over the years, owning gold bullions and coins has become much easier and accessible. In fact, these precious products can be bought on e-commerce sites such as Lazada and Shopee, with various sellers hawking gold bars at sizes ranging from as petite as 10g to 100g and costing north of $9,500 or more.

Gold ETFs track gold prices by either owning gold bullion or a basket of gold miners. They provide investors with an easy way to invest in gold without having to incur the additional expenses associated with bullion. These funds are also highly liquid as they can be bought and sold on an exchange.

Photo: Phillip Nova market analyst Priyanka Sachdeva

According to Tsui, there were strong inflows into ETFs since the start of the banking crisis fears. Since March, the firm has seen an inflow of about US$4.5 billion into gold ETFs. State Street’s SPDR Gold Shares ETF — the world’s largest physically-backed gold ETF cross-listed in Singapore — captured about 44% of this inflow, says Tsui. As at June 13, the ETF has a net asset value of US$181.51 and an asset under management of US$58.5 billion.

Gold stocks, on the other hand, have the potential to offer higher returns as well as dividend income that is subject to company performance. However, they come at greater risks due to company-specific reasons such as management decisions, gold production rates and financial stability.

Singapore Exchange-listed CNMC Goldmine 5TP -

, for example, reported earnings of US$0.12 million for its FY2022, down 93.1% from the previous year due to a 22% fall in revenue as its gold output was affected by downtime of approximately one month during the third quarter of the year. Last September, the company started commercial production of lead and zinc concentrates, after more than a decade of producing and selling gold. This is to expand its income stream and help mitigate any volatility in earnings from gold sales.

Another example is pawnbroker ValueMax T6I -

, which registered FY2022 earnings of $44.4 million, 7% higher y-o-y on the back of 4.2% y-o-y revenue growth to $247.1 million. ValueMax’s revenues from its moneylending and pawnbroking businesses increased by $9.4 million and $5.3 million respectively, while revenue from retail and trading of jewellery and gold business decreased by $3.1 million.

“In summary, gold stocks are perhaps better suited for investors who want higher returns and have higher risk tolerance. Between gold ETFs and gold bullion, the former is better suited for passive investors who want convenience, liquidity and regular dividend income. Bullion will be a better option for investors who want to fully own the physical commodity and do not place a priority on dividend income,” says Lim.

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