Gold rush comes to town
Low interest rates and expectations of weak US dollar to sustain positive trend of the yellow metal
A NEW record for gold prices appears inevitable.
After hitting an all-time high of US$1,980 an ounce over the week, the precious metal could well be on its way to test US$2,000 an ounce in the near term, according to several analysts.
They attribute this bullish trend to the massive stimulus measures from the US Federal Reserve, which has pushed down bond yields and resulted in the weakening of the US dollar, as well as uncertainties arising from the Covid-19 pandemic and geopolitical tensions.
In general, gold has surged nearly 30% since the beginning of the year. The last two weeks alone, it has gained almost 9%.
The strong surge in gold prices has also benefited Malaysian jewellers, namely, Poh Kong Holdings Bhd and Tomei Consolidated Bhd. Both companies have seen their share prices rise to multi-year highs in tandem with the spike in gold prices.
The last two weeks alone saw Poh Kong’s shares rising 67% to close at 78.5 sen on Thursday, while Tomei’s shares had almost doubled to 86sen.
Similarly, the Tradeplus Syariah Gold Tracker, which is the country’s first syariah-compliant commodity exchange-traded fund (ETF), has also rallied.
Year-to-date, the gold ETF has increased by almost 32%.
One fund manager tells Starbizweek that while the surge in gold prices has drawn investor interest to local jewellers, the sustainability of the upward trend in their share prices will remain dependent on fundamentals.
“As long as the outlook on gold prices remains positive, the share prices of locally listed jewellers will remain supported at elevated levels. Strong gold prices will help lift the earnings of these companies, and hence, the positive sentiment towards their stocks,” the fund manager with a local financial institution says.
“But eventually, it is the fundamentals such as the price-earnings (PE) ratio, revenue and balance sheet metrics of these individual companies that will determine the sustainability of their share prices,” he adds.
At current levels, both Poh Kong and Tomei are trading at around 12 times PE, and 0.57 times book value.
Although gold prices have reached new highs, some analysts continue to see further upside for the precious metal.
Schroder Investment Management, for instance, argues that gold and gold equities in particular are signalling that this (rally) cycle has a lot further to run.
In a recent note to clients, the fund management company says against a backdrop of record high global debt, it believes the economy is moving through a major epoch-change in global macro policy towards a much greater acceptance of inflationary outcomes.
“The result is likely to be more deeply negative real interest rates and greater risk of broad currency debasement. In this environment, continued increases in gold allocations could have extraordinary impacts on aggregate private gold holdings,” Schroder points out.
“We don’t see why gold prices should be somehow capped at current levels at all in such an environment,” it adds.
For gold producers, current operating conditions are exceptionally good, and stand in stark contrast to 2011, when gold reached its then-record high of US$1,922 an ounce, Schroder says.
“On the revenue side, gold prices are being driven by understandably strong demand for gold as a monetary hedge. Meanwhile, operating costs remain broadly under control and management attitudes to large scale capital spending remain conservative.
“This is leading to both record operating margins and record forecast free cash flow generation, which is likely in turn to trigger material increases in distributions to shareholders. Despite this, gold equities have barely begun to outperform the price of bullion itself, another sign this cycle has much further to run,” it explains.
Also positive on gold is Goldman Sachs, which expects the safe-haven metal to US$2,300 per ounce in the next 12 months due to growing concerns over the US dollar’s global standing as a reserve currency.
The investment bank says gold has plenty of room to run against a backdrop of rising geopolitical tensions, elevated political uncertainties in the United States, and unabated concerns over the Covid-19 pandemic.
Continuous streams of stimulus and measures taken by policymakers to fight the economic downturn caused by pandemic will lead to a significant rise in debt in the future. This in turn will lead to policymakers allowing inflation to rise, boosting precious metal prices, Goldman says in its report.
Similarly, Citigroup notes the current gold prices seem biased to stay higher for longer, with 2019-2020 emerging into a unique bull regime for the yellow metal.
The bank’s short-term target for the precious metal is US$2,100 an ounce, and it expects prices to reach US$2,300 in six to 12 months under a bullish scenario.
Even more bullish is Bank of America Corp, which is sticking to its April forecast for S$3,000-an-ounce gold over the next 18 months.
Meanwhile, UBS says it has added gold to its “most preferred asset list” in its global asset allocation.
“In a portfolio context, adding gold offers diversification benefits alongside providing shelter from volatility,” the investment bank explains in its recent note.
UBS says gold around US$2,000 is the new normal, and expect prices to climb to as high as US$2,300 in its risk scenario.
It says low interest rates, weak US dollar, rising geopolitical tensions, especially between China and the US and limited supply growth due to restrained capital spending by mining companies will underpin gold’s price gain.
Credit Suisse, on the other hand, expects gold to experience a consolidation phase in the immediate term before resuming its uptrend towards US$2,000 psychological mark.
The Swiss investment bank says in its note despite recent pullback, it maintains its core bullish bias on gold, with immediate resistance seen at the psychological US$2,000 barrier.
Its technical analysts shows the next tougher resistance test will be at US$2,075 to US$2,080 an ounce.
“While our bias would be to look for a consolidation phase to unfold from here, a direct break can see resistance at US$2,175-US$2,180 next, then US$2,295-US$2,300,” Credit Suisse says.
“Support for a pullback is seen at US$1,804 US$1,796, then US$1,765, with US$1,671 ideally holding,” it adds.
Spot gold rose 1% to US$1,976 an ounce as at 2.51pm yesterday, after declining about 1% a day earlier, while the Bloomberg Dollar Spot Index slipped about 0.5%.
Gold is traditionally seen as an effective store of value and an insurance against inflation to preserve wealth. It is also widely regarded as a “safe haven” in times of economic uncertainties and market volatility. But gold investment is not for everyone. Legendary investor Warren Buffett, for one, has always said gold is a bad investment. And reports say he is still not buying it, as the yellow metal is does not generate earnings or pay a dividend like a stock, or interest like a bond.
To some, gold is an emotional investment, with prices of the commodity often driven by fear, rather than fundamentals.
RHB Investment Bank regional equity research head Alexander Chia says the default action for those who have a very negative view of the future would be to run to a safe haven store of value such as gold.
However, he says, bear in mind that if you invest in gold, it’s a zero return.
“There’s no yield. But of course with most other risk assets also generating pretty low yields and with the interest rates in the US close to zero, then to them, it’s almost the same if you put your money in gold,” Chia says.
Regardless of one’s view on gold, including the yellow metal in one’s investment portfolio remains a form of diversification.
And as money managers always say the key to successful investing is to create a diversified investment portfolio that reflects one’s appetite for risk.
Global Forex Market
RISK appetite improves after the US Federal Reserve vows to support the virus-battered economy, sending the dollar to a two-year low of 93.39, down 1.11% week-on-week (w/w).
While the decision to keep interest rates unchanged at 0%-0.25% was expected, the Fed reiterated its commitment to keep rates at zero bound “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”.
The Fed also expressed its commitment to maintain its bond purchases and the array of lending and liquidity programmes associated with the virus response. However, the Fed delivered a tepid outlook on the US economy as the recovery will be dependent on the coronavirus’ trajectory. The greenback was partially dragged by a stalemate between the Republicans and Democrats on striking a coronavirus relief deal.
Brent crude gained 0.92% to US$43.74 per barrel owing to: (1) a weaker dollar; (2) expected US stimulus measures; and (3) a steep drop in crude inventories. According to the Energy Information Administration, the crude oil supply was reduced by around 10.6 million barrels for the week ending July 24, compared to a 4.9 million buildup in the previous week (cons: +0.4 million).
The euro briefly punched through the 1.18 handle, before closing at 1.177 (up 1.0% w/w). The gains in euro were primarily driven by the weakness in the dollar following the relative improving eurozone economy versus the US.
Nevertheless, key data release this week includes: (1) July’s EU flash Markit Manufacturing PMI up at 51.1 from 47.4 in June (cons: 50); and (2) July’s flash Markit Services PMI higher at 55.1 from 48.3 in June (cons: 51).
The pound appreciated 1.47% to 1.298 benefiting from the weaker dollar. Key data this week includes: (1) retail sales which came in at 13.9% m/m in June from 12.3% m/m in May (cons: 8.0%); and (2) July’s CBI Distributive Trades Index at 4 from -37 in June (cons: -25).
The yen rose 1% to 105.1 due to higher demand for safe-haven assets. In Bank of Japan’s summary of opinions, the policymakers debated how the coronavirus pandemic could reshape the monetary policy and its impact on the economy. Domestic recovery would be modest and could be delayed depending on how long it takes to contain the outbreak.
The majority of Asia ex-japan currencies strengthened against the weaker dollar. The top gainer was the Korean won, rising 0.75% to 1,192, followed by the baht, up 0.67% to 31.42 and the Taiwanese dollar, adding 0.58% to 29.31. Back home, the ringgit climbed 0.45% to 4.244 ahead of the Hari Raya Aidiladha celebration.
Key economic data released this week includes: (1) trade surplus widening to Rm20.9bil in June from
Rm10.4bil in May; (2) exports rebounded by 8.8% y/y from -25.5% y/y; (4) imports at -5.6% y/y from -30.4% y/y in the previous month; and (5) June’s Producer Price Index at -4% y/y as compared to -5.5% y/y in May.
US Treasuries (UST) Market
The US Treasury curve fell 1.6bps– 2.6bps, save for the 30-year tenure that rose 0.1bps. The demand for the treasury papers came after the Fed pledged to keep its policy accommodative until unemployment recovers and inflation strengthens. The Fed also said the path of the US economy “will depend significantly on the course of the virus”. Expectations for the Fed to stay supportive and revive price pressures have helped to steepen the yield curve, creating a wider spread between short-term and long-term yields. As at noon Thursday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 0.12%, 0.25%, 0.56% and 1.22%, respectively.
Malaysian Bond Market
Buying flows were sustained in the local bond market with the MGS curve falling 1.5bps–4.5bps. The 10-year MGS dipped to as low as 2.565%. The demand emerged after the reopening of the 7-year GII with an issuance size of Rm4bil, smaller than the past three auctions. The smaller issuance, along with the government concluding a Us$2.5bil cash payout by Goldman Sachs, which is expected to reduce the government’s gross issuance in 2020, led to a slightly bullish sentiment in the market.
Nevertheless, the re-issuance of the 7-year GII ‘09/27 garnered a strong BTC of 2.045x. The auction closed with a high/low/average of 2.285%, 2.265% and 2.280%. As at noon Thursday, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 1.93%, 2.12%, 2.26%, 2.55%, 2.96%, 3.18% and 3.54% respectively.
Activities in the govvies segment shrank by 43% w/w to Rm19.9bil from last week’s Rm34.7bil. The MGS segment shaved off 45% w/w to Rm10.6bil from Rm19.1bil in the previous week. Similarly, the GII slipped 38% to Rm7bil from Rm11.4bil.
Meanwhile, the short-term bill (MTB/MITB) trading declined 43% w/w to Rm2.3bil from Rm4.1bil.
In the GG/AAA segment, Danainfra Nasional Bhd 2021–2049 IMTNS dominated the list with a total of Rm635mil, trading between 2.02% and 3.92%. Meanwhile in the AA segment, Southern Power Generation Sdn Bhd 2025–2035 tranches gathered Rm198mil at 3.01%–4.04%.
MYR Interest Rate Swap (IRS) Market
The IRS was seen easing 0.5bps– 6bps across the curve. The threemonth Klibor fell 1bps to 2.01%. Elsewhere, the five-year CDS fell 2.5% w/w to 58.86bps.
Malaysia Equity Market
During the week (July 24-30), global equity markets took a breather, with the FBM KLCI easing 5.24 points or 0.33% to 1,601.18, while the MSCI Emerging Markets Index gained 0.83% and the Dow Jones Industrial Average retracing 0.42%.
Apart from the unabated Covid-19 pandemic, the market performance was also weighed down by an escalation in Us-china tensions (after Beijing ordered the closure of the US consulate in Chengdu, in retaliation to the US closure of China’s consulate in Houston) and the concern if the US$600 federal unemployment benefit (which expired on July 31) would be extended and if so, whether it would be reduced. Reflecting investors’ riskoff sentiment, gold prices jumped to an all-time high of nearly Us$2,000/oz. This was partially cushioned by dovish remarks from the Fed at the end of its two-day policy meeting.
Foreign investors remained net sellers in the local market. For the week, foreign investors sold a total of Rm0.4bil worth of Malaysian equities, bringing the YTD net outflow to Rm18.7bil. The foreign selling was well absorbed by local institutional and retail investors, with a participation rate in July of 48.1% (vs. 47.8% in June) and 39.4% (vs. 37.0% in June) respectively. As foreign investors stayed passive, their participation rate in July fell to 12.4% (vs. 15.2% in June).
Conversely, foreign investors piled into Malaysia Government Securities (MGS) with a net inflow of Rm7.8bil in June 2020, up significantly from a net inflow of Rm1.9bil in May 2020. However, year to date, foreign investors remained net sellers of MGS with a total net outflow of Rm7bil.
Trading activities remained on an uptrend with the average daily value traded rising to Rm5.2bil in July (vs Rm4.6bil in June) while turnover velocity increased to 79.9% in July (vs 70.9% in June).
Over the week, seven out of 13 sectors in Bursa Malaysia ended in positive territory. The top performing sector was Technology (+5.5%) as the sector had shown tremendous resilience during the pandemic.
The worst performing sector was Energy (-3.5%) on concerns over a collapse in demand again if nations dial back the economy and border reopenings on a resurgence in Covid-19 infections.
In the coming week, investors will keep a close eye on:
> Malaysia’s Manufacturing PMI (July) on Aug 3;
> Malaysia’s external trade Indices (June) on Aug 4;
> Malaysia’s Industrial Production
Index (June) on Aug 7;
> Malaysia’s Labour Statistics (June) on Aug 7; and
> Manufacturing Statistics (June) on Aug 7.
For enquiries, please contact: ambankfx-research@ambankgroup.com or bond-research@ambankgroup.com