Monday, May 6, 2013

Thoughts of gold as an investment

OVER the past two months, investing in gold has been rather volatile. We witnessed the huge sell-off in the gold bullion price that shocked many. In the process, we saw the appetite for gold surged. And gold traders are divided over whether bullion will extend declines after the biggest plunge in three decades.

Source from (The Sun Daily): http://www.thesundaily.my/news/689037
Published: May 06, 2013

 
 Anthony Dass is chief economist at 
MIDF Amanah Investment Bank Bhd.

Gold tumbled 13% in the two sessions through April 15, 2013, the biggest drop in 33 years. The sharp drop was due to concern that the European governments would follow Cyprus in selling off reserves and the slowdown in Chinese growth that sparked declines across commodities.

What should investors do? But before answering this question, it is important to determine what is the aim of gold investors. Are they investing in gold with the objective to diversify their assets? Alternatively, are they investing with the aim to trade and reap profits? Or are they investing as retail consumers?

To answer the above questions, we felt that it is important to try and determine as to whether the selling of gold bullion is over simply because spot gold price has improved by 9.2% following the 'trough' in mid-April of US$1348.21 per ounce to US$1472.59 on May 3, 2013. We also found futures gold price rose sharply reflected by the June delivery, which traded at US$1,465.15 per ounce.

The recent increase in gold price comes following the European Central Bank reduced interest rates to a record low in May and the US Federal Reserve (Fed) re-affirmed its commitment to leave interest rates unchanged near zero and continue buying US$85 billion in debt each month. Hence, lower interest rates can give gold a lift, as it decreases the relative cost of holding on to the metal, which does not offer investors any similar guaranteed payout.

Also, we believe the rise in gold price to some extend may have benefited from the surge by Asian buyers, who took advantage of the sharp plunge in prices. By Indian stepping up their purchases of bullion, up 20% in sales, it resulted to the US Mint running out of the smallest American Eagle gold coin. We expect the physical demand for gold bullion from India, the world's biggest consumer to remain strong, likely to jump between 36%-40% through June compared with a year earlier. Also, it was reported that Australia's Perth Mint doubled their sales.

However, it is of our view that the current movement of the gold price largely tracks shifting expectations as to whether the Fed would end its bond-buying programme sooner-than-expected.

Hence, it is important to take note that any improvement in the US economy could scale back expectations for additional easing by the Fed. The Fed has clearly pointed out that it would continue with its US$85 billion monthly bond-buying purchases, but added that it may raise or cut the programme subject to economic conditions.

It is going to be a tough task for us to determine whether gold price still risks falling or has bottomed out given that there is no clue as to how much investors hold and what is their intention for holding gold bullion.

Despite the tough task, we believe one can use proxies like the 'change in volume' to determine the state of the gold price. It should shed some light as to whether the gold price would fall further or has reached the bottom. It is important to take note that while focusing on the volume traded, one must remember that there is no certainty that an increase in demand can overcome the selling pressure.

Taking a cue from here, what should investors do? Our view is that if one invests in gold as part of one's portfolio, it kind of makes sense. This is provided that one understands that volatility will continue to be present simply because larger investors have added gold bullion as another asset to trade, and so it has become increasingly difficult to determine the gold price.

Alternatively, one could invest in gold bullion for trading purposes. We feel this is good since gold can provide plenty of volatility. However, one must be flexible in being able to go both long and short with gold at a moment's notice. Also, one could invest in gold as an insurance policy. Such strategy would mean that the investor need not check the price movement on a daily basis.

We expect retail buying to remain strong driven by the pent-up demand by the consumers who were priced out of the market for years. In our view, these consumers' are likely to continue buying as long as they can enjoy some level of discount. Also, we found the timing of the drop in gold prices

benefited the Indian consumers, taking advantage of the coming wedding season and ahead of the festival of Akshaya Tritiya where gold buying is traditional.

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