Experts bullish on gold

However, near-term correction not discounted as precious metal hits US$2,305 per ounce on overnight trading

“The current price itself may deter retail demand for gold jewellery consumption at this level but not gold investment.”

Vincent Lau

PETALING JAYA: The rise in the price of gold to new highs has induced similar movements in the share prices of a number of gold-related counters on Bursa Malaysia, although analysts believe a correction may be due.

The precious metal went past the psychological US$2,300 per ounce ceiling on overnight trading yesterday, touching a peak of US$2,304.96, following remarks from the US Federal Reserve (Fed) chair Jerome Powell that it could be appropriate to begin lowering borrowing costs “at some point this year”.

Historically, gold and equities have had an inverse trading relationship, but the strengthening of the US dollar over the past few years has put paid to that theory, as stocks have risen and fallen in tandem with bullion in contrast to the greenback.

Aside from the Fed factor, central banks, led primarily by the People’s Bank of China, have also been adding gold to their holdings as observed by the World Gold Council, while unabating geopolitical tensions have also lent support to the precious metal’s price appreciation.

It is no wonder that gold-related counters such as Poh Kong Holdings Bhd and Tomei Consolidated Bhd have likewise seen healthy additions to their share prices, especially since February, when the gold rush began.

According to Rakuten Trade head of equity sales Vincent Lau, the beneficiaries of the golden bull run include miners, jewellers as well as pawnbroking companies on the Malaysian stock exchange.

Companies that are likely to benefit are mining players like Bahvest Resources Bhd, jewellers such as Poh Kong and Tomei, on top of pawnbrokers Pappajack Bhd and Evergreen Max Cash Capital Bhd (EMCC), the latter two whom he estimates hold a major portion of their collateral in gold.

On the flip side, he told Starbiz that with bullion prices having strengthened by almost 28% from its approximate US$1,800 level back in October, a pullback in the short-term may not be totally discounted.

“The current price itself may deter retail demand for gold jewellery consumption at this level but not gold investment,” Lau said, pointing out that a profit-taking and consolidation breather move among investors is only logical, which would then provide more opportunities for consequent rounds of demand.

Another analyst with a local research firm concurred, especially in light of the fact that the dollar has not exactly weakened throughout the recent period of appreciation for the precious metal, since gold is denominated in US dollars on global markets.

This is underpinned by Fed rates that are still elevated, factors that are typically considered headwinds for gold.

Explaining further, the analyst commented that a strong dollar should make gold more expensive for holders of other currencies, leading to decreased demand and lower prices.

“In contrast, a weaker dollar makes gold relatively cheaper and pushes up demand, and therefore prices will also increase.

“Since we are still seeing a sturdy level for the dollar, a pullback in gold prices soon is not out of the question,” he said.

Senior market analyst at Capital.com Inc Kyle Rodda was also quoted by Bloomberg to have predicted a correction if the surge continues any further.

“There doesn’t seem to be a particularly good, fundamental reason that is clear and available to everyone to pin the move on,” he said.

Nevertheless, Rakuten Trade’s Lau believes the anticipation of a Fed rate cut would provide a support level to bullion prices, and further upside could be expected once the cuts actually occur, acting as catalysts.

“Therefore, we should see more upswing then for gold-related companies on Bursa Malaysia,” he said.

A note published yesterday by OCBC Global Markets Research to clients appeared to reinforce Lau’s views, stating that the research unit is maintaining its long-standing view of a constructive outlook on gold, on expectations that real rates should eventually correct lower as the Fed embarks on rate cut cycle.

“Our house view expects the Fed to begin its rate cut cycle in June 2024 and we pencilled in a total of 100 basis points (bps) cut for 2024 and another 100 bps cut for 2025.

“Historical evidence since 2001 also showed that gold strengthened when the Fed rate hike cycle ended and continued to extend its bullish run when the Fed rate cut cycle got underway,” said its foreign exchange strategist Christopher Wong.

Additionally, he is also expecting gold’s risk-off hedge (safe haven proxy) against geopolitical risks and as a portfolio diversifier to continue playing up more dominantly in driving up bullion prices.

Similarly, he is also warning of a brief impending consolidation, despite the bullish outlook.

“Near term, a pullback towards 2251 is not ruled out. Beyond this puts the next levels of support at 2194 and 2160.

“Bias remains for more upside to play out. Our view for bullish bias would be at risk of being nullified if gold declines past 2075,” said Wong.

With all that said, price movements for most such counters on the local indices were rather muted yesterday considering the overnight record price surge for the metal itself, with Poh Kong nudging down by half a sen to close at 94.5 sen as Bahvest gained as much to settle at 50.5 sen.

At the same time, Tomei closed unchanged at RM1.48, while pawnbroking services providers EMCC and Pappajack both made gains of one sen and half a sen to close at RM1.02 and 53.5 sen respectively.

Of note, the price of the metal itself retreated marginally to US$2,292.86 at 5pm yesterday.