The relationship between investors and gold is like that of a mother and her prodigal son. In good times, the son resents his mother’s influence and seeks out worldly pleasures by carousing with his dissolute friends. But when he gets into trouble, it is back into the warmth of his long-suffering mother’s arms that he flees to for refuge and comfort.
As the Covid-19 pandemic turned the world upside down, investors clung on tight to “mother bullion’s” apron strings as the fate of the global economy hung in the balance. Gold prices soared beyond US$2,000/troy ounce ($2,649.76/troy ounce) for the first time in August 2020. But with the post-pandemic recovery seemingly underway, investors have once more forsaken gold’s maternal embrace for more seductive propositions elsewhere.
The technical omens do not look good for gold lately, with technical analysts sighting the inauspicious “death cross” on their charts. As gold’s 50-day moving average crosses below its 200-day moving average, this augurs the coming storm of a major sell-off ahead. This is the first time this “dark mark” has shown itself in more than two years, says Craig Erlam, senior market analyst at Oanda, in a market update.
“Although gold has lost much of its appeal for investors in 2021 as compared to 2020 and the technical picture has deteriorated in favour of the bears rather than gold bulls, deep corrections of prices are still viewed as buying opportunities,” says Phillip Futures analyst Avtar Sandu in his March 10 note. “Our market view remains bullish for the long term despite the pressure that prices had from rising global government bond yields, which had incidentally also help the USD,” he says. “The long-term structural drivers that drove gold to historic highs last year remain in the bigger picture.”
Robin Tsui, APAC gold strategist, State Street Global Advisors, notes that gold enjoys a powerful talisman in its strong supporting level of US$1,780. Despite the “death cross”, there has not actually been much selling by investors; most of the gold correction is due to some institutional investors looking to take profit amid a stronger US Dollar. Retail investors are keeping gold to hedge against equity market risks amid weak fundamentals and potential Covid-19 headwinds.
“Central banks are still buying gold. In 4Q2020, central banks — especially in emerging markets — remain a net buyer in the gold market,” Tsui tells The Edge Singapore in a phone interview.
Old reliable
For Tsui, continued low yields in the US will continue to keep gold attractive at least in the medium-term. Admittedly, bond yields have been increasing of late — 10-year US Treasury yields hit 1.6% on March 8 — causing liquidity markets to perform well and gold to suffer.
“Now the market is now more focused on the reinflation trend, which does mean higher interest rates, that has taken some of the wind out of the sails for gold,” says St Clair of Fullerton Fund Managers. He does not expect the same strength of price appreciation for gold as was seen last year, which saw gold deliver 25% returns.
Yet, says Tsui, current negative real interests rates, which are the real driver of gold prices, will persist due to impending fiscal stimulus in the US and accommodative monetary policy. This will favour gold prices at least in the medium term.
As a result, the cooling effect of a strong US Dollar on gold is also unlikely to continue in the medium-term. Despite the US Dollar index reaching a 3.5-month high of 92.30 as of March 9, the greenback is seen to remain weak beyond that due to higher inflation expectations and continued expansionary fiscal and monetary policy. There is a very strong inverse correlation, Tsui tells The Edge Singapore, between the strength of the US Dollar and gold prices, hinting at a price recovery for bullion in the coming months.
Naturally, gold will like other commodities be looked upon as an effective inflation hedge as the commodity bull sweeps through the markets. During a high-inflation environment (>5%), the average yearly return for gold historically was 16% while in a low-inflation scenario (2% to 5%), average yearly return was around 8% historically. Recent inflation expectations, he argues, will see investors begin to stock up, driving up prices.
Even if real interest rates do not rise, says St Clair, it is perhaps worthwhile to keep gold in one’s portfolio. Gold is a key hedge against recession and geopolitical risks, making it a good bulwark in volatile markets defined by great power rivalry.
But gold is not just a safe haven. In fact, notes Tsui, it actually performs very well during economic booms due to the influence of consumer markets. More than half of global demand for gold comes from the consumer market, with about 50% driven by jewellery alone based on data from the past five years.
As demand for jewellery is likely to pick up once again as economic optimism recovers, gold will likely be in strong demand. The tech sector also relies on gold as a key component for tech products, with smartphones and computers relying on the precious metal for components. This will potentially allow bullion to ride the wave of rising consumer demand as consumers once again consider discretionary expenditures like jewellery and high-tech gadgets.
ETFs are an effective way for retail investors to gain exposure to gold. ETFs are cheap, liquid and easily traded while also providing portfolio diversification that cannot be accessed by mining stocks, which are highly influenced by gold prices. Investors can also avoid having to pay extra for custodial costs like if they bought physical gold instead, as well as enjoying lower barriers to entry since ETFs can fractionise units of gold for more affordability.
Still, investors should take care when selecting their ETFs or stocks, since these may not track physical gold prices exactly. Moreover, with ETFs charging management fees, it would also be worth assessing how much one is willing or able to pay for this service before investing in an ETF.
New gold for old?
One particularly compelling gold alternative is bitcoin — the most established of the cryptocurrencies — which saw a record high of US$58,354 on Feb 22. Proponents tend to argue that bitcoin is the “new gold”, with its greater scarcity, portability and divisibility — it can be traded to the eighth decimal place — making it a superior store of value to gold.
Tsui acknowledges the similarities between the two assets. Both enjoy the scarcity of finite supply as well as being free of government controls. In fact, he tells The Edge Singapore, he does not discourage investors from buying bitcoin. Cryptocurrencies provide diversification to an investor’s portfolio while allowing investors to ride the cryptocurrency growth story.
That said, the gold strategist does not see bitcoin as the equivalent of gold. The latter, Tsui observes, enjoys stronger support since it is more accepted by financial markets. Both investors and central banks have no problem buying and holding gold, while the sources of demand for bitcoin, he says, are often less clear or stable, resulting in higher price volatility even as it slowly wins over institutional acceptance.
Gold also enjoys greater liquidity vis-a-vis bitcoin, making costs of entry and exit much lower. “Daily, the gold market trades approximately about US$200 billion a day but if you look at bitcoin, for example, it trades about between US$1 billion and US$5 billion a day,” says Tsui. It is therefore easier for gold investors to liquidate their bullion than bitcoin since people still value gold liquidity over bitcoin, though that could still change as trading volumes increase.
In fact, bitcoin is largely still treated with suspicion by governments: US treasury secretary Janet Yellen recently called it “highly speculative”. Prices are therefore typically highly subject to regulatory risks, which established assets like gold are less subject to. Michael Bollinger, CIO of global EMs at UBS, even warned in a report that there is little stopping cryptocurrency prices from being pushed to zero if regulatory changes dampen market sentiment.
“To say that bitcoin is gold number two is quite unfair,” surmises Tsui in light of this assessment. It is perhaps better, says St Clair, for investors to stick to what they know best and what they are confident of trading.
