SINGAPORE (July 17): At US$1,217.12 an ounce on July 11, the price of gold is 6% below its year-todate high of US$1,294.39 an ounce. Anticipation of higher interest rates may have been behind the recent selldown, as some investors moved out of gold and into higher-yielding US Treasury bonds. And as investors’ appetites for risk improve, money is flowing out of safe-haven assets and into riskier ones.

But some market watchers are suggesting that gold prices have bottomed out and may even head higher. Greater geopolitical uncertainty as well as volatility in the US market linked to President Donald Trump’s ties with Russia may create more demand for gold going forward. And a correction in equity markets — now viewed as increasingly possible after a multi-year rally — could nudge investors towards commodities.

Julius Baer’s commodities research analyst Carsten Menke says in a media commentary that positioning among short-term traders is now “neutral to slightly bearish, limiting downside for gold from today’s levels”.

Ned Naylor-Leyland, fund manager of the Old Mutual Gold & Silver fund, is convinced that gold prices have room to run. His confidence stems from technical data that, he says, has accurately predicted movements in gold prices for the last three decades.

According to Naylor-Leyland, gold prices tend to rise after the 50-week moving average breaks above the 200-week moving average. This formation is known as a golden cross. When the 50-week moving average falls below the 200-week moving average — known as a death cross — it tends to lead to falling prices. Naylor-Leyland says the charts showed a golden cross in December.

“It is a pretty powerful signal,” he tells The Edge Singapore in an interview. “Looking at the evidence, it has worked every time for 30 years. It is more probable that it will work [again] than it won’t.”

Equity exposure
Naylor-Leyland’s fund primarily holds stakes in gold and silver miners. Kevin Chen, head of wealth management at financial advisory firm Promiseland Independent, says miners can be an attractive option for investors looking for a play on gold prices. “If the investor prefers a form of return that is not solely confined to the price of gold itself, then gold funds would be a better choice of exposure. For example, even if gold prices fail to appreciate, investors in gold funds may experience a profit in their investments due to the appreciation of equity prices in general,” he says.

As at June 30, the Old Mutual fund had 80.4% of its assets in equities. Miners that are among its largest holdings are UK-listed Hochschild Mining, US-listed Coeur Mining, Mexico-based Fresnillo, and Silvercorp Metals, MAG Silver Corp, and Pan American Silver Corp, all listed in Canada.

Also among the fund’s top holdings is Central Fund of Canada, which holds gold and silver bullion on a secure basis for the convenience of investors in the shares of Central Fund. The Old Mutual Gold & Silver fund also has 17.9% of its assets in bullion and 1.7% in cash. The fund is only available to accredited investors.

Year to date, the fund has returned 4.5%, underperforming major indices such as the Standard & Poor’s 500 index (up 9%) and the MSCI World Index (up 11%). It has also underperformed physical gold (up 6.5%).

But Naylor-Leyland expects to catch up as gold miners’ margins improve. Gold mining companies are expanding as demand and prices improve, but mining costs are generally flat to declining. This is because a huge amount of capacity was built up in the mining sector during the commodities “super-cycle” of the past decade. “The costs of hiring contract miners were going up and up the last time round. Now that the super-cycle is on its knees, all those businesses that were set up to service the demand are sitting around wanting work. So the costs are going down,” he says.

Not all miners will benefit equally from this trend though. Although Naylor-Leyland’s fund has underperformed other sectors, it has outperformed many of its peers because of the stocks it holds. The United Gold & General Fund, which owns names such as Newmont Mining Corp, Barrick Gold Corp and Goldcorp, has returned a negative 1.6%. The Investec GSF Global Gold Fund, which also owns Newmont and Barrick, as well as Agnico Eagle Mines and Evolution Mining, has returned a negative 2.4%. In fact, all the equity-linked gold funds available to retail investors here have performed poorly year to date.

Physical gold and ETFs
Another investment option is the SPDR Gold Shares ETF, a physical gold-backed exchange-traded fund. It holds physical gold bullion in the form of London Good Delivery bars. The ETF has generated a year-to-date return of 4.3%, which is still slightly less than the Old Mutual Gold & Silver fund.

Robin Tsui, vice-president and ETF gold specialist at the APAC SPDR ETF business, says demand for gold ETFs has been “quite stable”. In 1H2017, the total net inflow into physical gold-backed ETFs was about US$6.5 billion — the largest since the gold ETF market was launched in 2002.

“Gold ETFs have become popular in recent years as they enable you to access the asset class, rather like buying a stock. They enable investors to benefit from upward movements in gold prices in a relatively liquid way,” says David Pugh, director at expatriate financial advisory firm The Fry Group Singapore.

Alfred Chia, CEO of financial advisory firm SingCapital, says gold ETFs are cheaper, too, because investors do not need to pay for costs associated with purchase, storage and insurance of physical gold. Tsui says the higher costs of physical gold could be a premium of 5% to 10% over the spot price.

Holding gold bullion, however, has its advantages. Chia calls this the “safest form of investing in gold”. Physical gold has no counterparty risks, unlike gold ETFs and funds. It also provides a psychological sense of financial security as investors can hold, touch and see it.

Michael Kempinski, managing director of bullion trader Degussa Singapore, thinks gold is unlikely to fall below US$1,100 an ounce as he sees “strong physical support” at that level. Should prices fall below US$1,200 an ounce, he recommends that investors take the opportunity to buy in.

This article appears in Issue 788 (July 17) of The Edge Singapore whoch is on sale now