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Glimmer of hope for gold investors

Publication Date : 16-12-2013


Gold has turned out to be a bad investment this year. And the odds are that it will remain a bad investment for next year.

As the year draws to a close, analysts gazing into their crystal balls are predicting that gold prices may head towards the US$1,000-an-ounce level.

Gold's problems are well-documented: Its price shot up sharply after the global financial crisis five years ago, as investors loaded up on the precious metal, fearful of the inflation that might be kindled by the US central bank as its printing presses went into overdrive to try to nurse the sick US economy back to health.

But since May, when US Federal Reserve chairman Ben Bernanke first flagged the possibility of scaling back on the US$85 billion of fresh money it was printing each month, gold has fallen by about 16 per cent.

This brings its total loss to 33 per cent after hitting its peak of US$1,888.08 in June 2011.

All this has left Western investors disillusioned with gold because inflation stayed stubbornly low in the US despite the massive money-printing efforts. And as the metal offers no yield other than capital appreciation, they have turned to alternative investments such as the US equities market to get a higher return.

Worse, as the Fed rattles its sabre about cutting back its vast money-printing programme, fund managers were forced to scale back on their investments in emerging markets such as India.

This is because any drying up of the Fed-driven liquidity may cause the greenback to strengthen. That makes it less attractive for them to borrow in US dollars in their quest to get a higher return in emerging markets.

But in their scramble to get out, they trigger other problems as they dump currencies such as the rupee to switch back to the greenback. That has added to gold's problems since jewellery demand from countries such as India had always been a key reason for buying the precious metal.

In the third quarter, the World Gold Council (WGC) reported that consumer demand for gold in India fell 32 per cent, compared with the same period last year.

There is one further problem: If traders believe that gold's price is likely to stay flat or drop, they are better off switching out of the metal and buying a futures contract, which costs a fraction of the price of holding the physical stuff.

That puts further pressure on gold, as investors dump exchange-traded funds (ETFs) specially created to hold the metal.

Not surprisingly, the WGC reported a net outflow of 119 tonnes of gold from ETFs in the third quarter. This was on top of the 400 tonnes held in ETFs which were sold by investors in the second quarter.

Still, despite all the gloom and doom, gold still trades at about four times the level it was at when it kicked off its rally 13 years ago. Its latest tumble takes it back only to a price first breached in September 2010.

The drastic fall in its price, owing to huge sales by investors holding gold ETFs, may have the unintended effect of making gold a more alluring investment for retail investors picking it up in the form of jewellery, coins and bars.

The WGC noted that in the third quarter, total consumer demand in China had gained 18 per cent to 210 tonnes, compared with the same period last year. Jewellery consumption in Southeast Asian countries such as Vietnam, Thailand and Indonesia was also up sharply.

The fall in gold price has also made it attractive for central banks to start hoarding the precious metal again. In the third quarter, they picked up 93 tonnes, making it the 11th straight quarter they were net buyers of gold.

So what do the conflicting trends spell for equity investors as the demand for gold moves from Western investors to Eastern consumers?

For one thing, the continued ebbing in gold prices is bad news for gold miners. The share price of Barrick Gold, the world's biggest gold producer, has fallen 70 per cent from its 2011 peak, while Newmont Mining is down 68 per cent.

Both stocks have crashed to their lowest levels in 11 years, despite the bull run on Wall Street which has seen the widely tracked S&P 500 soaring by 25 per cent this year.

Hong Kong-listed jeweller Chow Tai Fook is one business that is benefiting from the trend. Falling gold prices have caused demand for jewellery to soar at its outlets all over China. As a result, its profits for the six months ended Sept 30 almost doubled to HK$3.5 billion (US$451 million). That, in turn, helped to boost its share price by 52 per cent since June.

So, while the outlook for gold may be dour, some companies are doing very nicely out of its misery.

For investors, the challenge is to find such golden pockets of buying opportunities.


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