Go Gold

Andrew Naylor, regional CEO of the World Gold Council (WGC), acknowledges that this year’s rally in gold was partly driven by geopolitical events. Nevertheless, from his perspective, the upward trend in gold has already been manifesting since 2020, in the midst of the pandemic.

“We saw record inflows into gold exchange-traded funds (ETFs) in August 2020, which is the result of increasing institutional interest in gold due to the financial uncertainty at the time,” Naylor tells The Edge Singapore in an interview.

Since the start of the year, inflationary pressure — driven by a combination of higher costs and stronger demand — helped lift gold prices up further.

Stephen Innes, chief global market strategist at AxiTrader, was not expecting gold to do well this year. The “war trade” caught many market observers by surprise. “Before the war, we were positioned to be tentatively long on gold, with the expectations that the US Federal Reserve [Fed] were only going to slightly increase interest rates.

See also: Gold holds near US$2,000 after Israel starts ground offensive

“However, the Fed has really stepped up to the plate. Typically, its really hawkish stance would generally be perceived as negative for gold. But the risks are probably skewed to the upside for further escalation of the war between Ukraine and Russia, which would probably drive prices to a new high,” says Innes.

He adds that the surging commodity prices will keep inflation rising, which in turn raises the spectre of stagflation. This could lead to higher allocation towards precious metals like gold and silver. However, Innes notes that he does not think a stagflation scenario is likely, expecting decent economic growth across major markets.

“People still have lots of money to spend. The slight additional prices on groceries or fuel, especially in some countries, will be offset by one-off allocations of fiscal responses or tax reduction. So I think to a great degree, the world is going to continue acting very much as normal,” he says.

See also: Weak correlation between gold and Bitcoin despite the latter's safe-haven asset claims

Strategic asset allocation

Historically, gold has been seen as a safe haven as it is a store of value with limited supply and is not impacted by interest rate hikes or cuts. The yellow metal has also been found to be a good hedge against the US dollar, based on literature published by academics that have researched its hedging abilities in different market conditions.

In its The Relevance of Gold as a Strategic Asset Class 2022 report, WGC found that gold’s average annual return of 11% in US dollars over the past 50 years has outpaced the US and world consumer price indices (CPI).

WGC believes that gold is able to protect investors against high and extreme inflation. In years when inflation is less than 3%, gold prices on average increase by about 7% per year. When inflation hits 3% or higher, gold’s corresponding gain is close to 13%. “The number would increase significantly with an even higher inflation level,” says Naylor.

According to the WGC report, the price of US dollars has increased by nearly 11% per year since 1971, when the gold standard — monetary system backed by the value of physical gold — collapsed. Over this period, gold’s long-term return is comparable to equities and higher than bonds. It has also outperformed many other major asset classes over the past five, 10 and 20 years.

WGC’s analysis also suggests that adding between 4% and 15% of gold to average hypothetical portfolios, depending on the composition and the region, can make a tangible improvement to performance and boost risk-adjusted returns on a sustainable, long-term basis.

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Gold allocations have been the recipient of the growing demand among institutional investors for alternatives, in a pursuit of diversification and higher risk adjusted returns. Global investment demand has grown by an average of 10% per year between 2002 and 2021, while gold price has increased almost seven-fold over the same period.

The precious metal’s dual nature as both a defensive and growth asset has allowed it to generate long-term positive returns in an economic upturn or downturn. This duality reflects the diverse sources of demand for gold, differentiating it from other investment assets, says Naylor.

According to the WGC, the single largest use of gold, at 36%, is to make jewellery. Another 40% is used for investment purposes such as making bars and coins. Naylor believes these two sources of demand are procyclical — people tend to buy more jewellery and make more investments in gold when the economy is doing well. “As the economy rebounds, we expect the demand for gold as jewellery and an investment asset class to recover as well,” he says.

Another key use, at 17%, is from central banks, which traditionally hold a certain amount of gold as reserves or as part of their portfolio. For example, the Monetary Authority of Singapore (MAS) increased its gold reserves by 26.3 tonnes, or around 20%, in May and June last year — its first increase since 2000. Based on gold prices last November, when the under-radar-buying was noted, MAS would have paid US$1.5 billion for the stash. As of Feb 22, Singapore’s official total foreign reserves stands at US$426.6 billion.

According to MAS, adding to the reserves of gold is part of its continuous efforts to make sure that Singapore’s official foreign reserves portfolio remains well diversified and resilient amid changing market conditions.

Meanwhile, another 7% is sought by the tech industry — an area with growing demand, as the metal is used in high-end electronics because of its non-corrosive nature unlike other metals. Gold is also used in the production of high-tech, high-end equipment in medical and automotive fields.

Despite this, when it comes to industrial use, Innes highlights that palladium and platinum are more in focus compared to gold as they are heavily used in the manufacturing of electric vehicles.

“The increasing switch to electric or hybrid vehicles are causing the focus to be on platinum and palladium. That’s where the crunch is, because Russia is a big exporter of those commodities. Gold does not operate in a vacuum — when commodities go up, gold goes up for the same reasons, not so much about its use,” says Innes.

Although he agrees that gold is a good hedging tool for investors from an asset allocation perspective, the influx of “gold tourists” who are speculating and causing increasing volatility has made investing in the yellow metal a bit more challenging, says Innes.

“These are not your typical gold investors — the gold tourists get spooked by a US$25 or US$50 per ounce move on gold. Meanwhile, longer-term investors who have been buying gold since it was in the US$1,200–US$1,500 range per ounce do not care about these moves, given their risk tolerance,” he adds.

From left: World Gold Council regional CEO Andrew Naylor and AxiTrader chief global market strategist Stephen Innes

Sustaining the upwards trend and risks

Now, where are gold prices heading? In a scenario of no stagflation, prices would eventually come under pressure as the Fed raises interest rates, says Innes. If growth starts to wobble, then there is a better chance that the Fed would reduce interest rates in 2024, adds Innes.

“It is not clear-cut, just because I think currently investors are buying gold as a war hedge. But we have to be very cognisant that we are in an environment where the Fed continues to press rates higher which is negative for gold, offset by the war trade,” says Innes.

Gold’s biggest risk currently is the end of the Russia and Ukraine war or simultaneously, Russian president Vladimir Putin being kicked out of power — partly driven by growing pressure from oligarchs facing the impacts of imposed sanctions. Russian billionaire Roman Abramovich, for instance, is currently scrambling to avoid the sanctions imposed by the UK by moving his superyachts away towards more friendly waters.

“Abramovich, who owns the Premier League football club Chelsea FC, cannot even own the team and own profit from it anymore,” says Innes, adding that the growing pressure could lead to a change of regime which spells a tail risk for gold markets.

Russia currently has a stash of about 2,000 tonnes of gold held in reserve, which might be brought back to the market to stabilise the rouble. While this could be a risk to gold prices, it may not be a likely scenario, given the rouble is stabilising on its own, says Innes.

Previously, Innes forecast gold to end the year at US$1,670 per ounce. Expecting the war to be “lasting”, he has since revised this figure to US$1,870, attributing it to the rising inflation and war premium. By then, the supply chain disruptions caused by China lockdowns should have eased, he adds.

“I don’t see a great deal of downside for gold, and this emboldens your typical gold investors as well as speculators to come back in the market because there’s a chance that it could blast up to new highs again. Up to US$2,100 per ounce is possible if an accident happens on one of the Nato borders and things start to escalate. So, I think it is a really good defensive hedge to own gold in this market,” he says.

Amid the uncertain market landscape, the debate about whether or not Bitcoin is a safe haven asset has revived as the digital asset sees larger allocation among institutional and retail investors alike.

Bitcoin versus gold as a safe haven asset

Bitcoin, the largest cryptocurrency by market capitalisation at around US$900 billion ($1.22 trillion), has been compared with gold as the two assets bear some similarities — particularly how they can be obtained through mining and their limited availability.

Only 21 million of Bitcoin, dubbed “digital gold”, can be mined, and about 90% of it is already in circulation. Given the similarities, some market observers expect the cryptocurrency to behave the way gold does — retaining or increasing in value during times of market turbulence.

This year, the price of gold rallied to over US$2,000 per ounce on March 8, a high it last achieved in August 2020. By comparison, Bitcoin also saw a surge at around the same time, when it reached a high of over US$42,400 apiece on March 10.

However, compared to gold, Bitcoin experiences a higher level of price volatility. The lowest price it recorded this year was US$33,520 per coin, a low last recorded in July 2021.

The narrative that Bitcoin is a safe haven asset resurfaced recently, as Russians and Ukrainians, amid the ongoing war, seek alternatives to their country’s financial institutions. Russia is mulling over Bitcoin as a means of payment for its oil and gas exports, while Ukraine has accepted millions of dollars in cryptocurrencies like Bitcoin to support its army and activist groups.

Although World Gold Council (WGC) regional CEO Andrew Naylor acknowledges that Bitcoin and gold bear some similarities, he says that the two assets are fundamentally different. “Aside from the limited supply, Bitcoin and gold share a similar decentralised nature, given that they are both not issued by the government.

“Fundamentally, however, they are different assets because of their demand structure. Gold has demand from central banks, tech, and jewellery, which Bitcoin does not have. [The latter] is primarily an investment vehicle with no inherent utility, hence more correlated to other assets. That is not the property of a safe haven asset,” says Naylor.

Aside from that, Bitcoin is also vulnerable to regulatory risk, which gold is not as susceptible to. Some markets have banned or are thinking of banning cryptocurrencies, while others such as India are taxing profits from trading in digital assets.

“We would argue that Bitcoin is a complementary asset, but it is not a safe haven unlike gold. We think that the gold market is also a lot more transparent compared to Bitcoin, which we view as a bit opaque,” says Naylor.

Meanwhile, AxiTrader chief global market strategist Stephen Innes points out that this year, Bitcoin has traded at about 30% correlation to risk-on assets. Unlike gold, he does not think that Bitcoin can be an inflation hedge given its price volatility.

“I think [the idea] that Bitcoin as an inflation hedge is just a fantasy. But it is something that we have to be cognisant of, as it is still trading above US$46,000 per coin, not US$1. I am in the view that Bitcoin is going to trade higher not because I like it, but because of the amount of people involved in it right now. While I don’t think it will ever replace fiat currency, people should own a certain allocation in a component of cryptocurrencies for portfolio diversification,” says Innes.

Different ways to invest in gold

There are many ways one can start investing in gold. You can either buy physical gold in the form of coins, bullion or bars from financial institutions or reputable retailers and pawnshops or purchase “paper gold”, which includes gold exchange traded funds (ETFs), gold-linked unit trust funds, gold-linked notes and spot gold, as well as gold mining stocks.

There is room in an investors’ portfolio for any type of gold investments as each has different liquidity profiles and risks, says World Gold Council (WGC) regional CEO Andrew Naylor.

Physical gold, for example, may present investors with storage, insurance and cost issues, while also not providing investors with any dividend or returns while in storage. Some of these issues can be eliminated by opening a gold savings account, which allows investors to buy and sell gold without having to physically purchase them.

AxiTrader chief global market strategist Stephen Innes says that gold ETFs would be the best option for a retail investor, discouraging leveraged products for non-traders due to its highly speculative nature.

He also does not recommend investors to look at gold mining stocks amid the current market landscape as the process to start up a new mine is generally perceived as a decade-long process. “The prices of gold stocks are obviously going to go up, but they are not going to go up in sync with what the gold markets are trading at. This is because large-scale operators’ reinvestment to open a new mine involves a long process of getting the rights needed to run their operations. It is a 10-year investment cycle that is very capital-intensive,” says Innes.

Meanwhile, Naylor reminds investors that not all ETFs are backed by physical gold — some are synthetic. “When an ETF is backed by physical gold, the investors effectively earn the physical gold and hence they do not face counterparty risk, unlike investing in gold-related stocks.”

World Gold Trust Services, a wholly-owned subsidiary of WGC, is the sponsor of SPDR Gold Shares, the world’s largest physically-backed gold ETF. Cross-listed in Singapore and available in the Singapore dollar, the fund seeks to reflect the performance of the price of gold bullion.

Buying one ounce of gold through SPDR Gold Shares may be relatively cheaper compared to buying and holding physical gold as the transaction costs are generally lower than the costs associated with the purchase and storage of physical gold, according to its product highlights. It is also highly liquid, as the liquidity comes from both primary market and secondary market trading on exchanges.

As at Dec 31, 2021, the SPDR Gold Shares ETF had provided an annualised return on the net asset value of 11.95%, 9% and 1.05% in the three-year, five-year and 10-year periods respectively. The fund currently has over 1,091 tonnes of gold in its trust worth US$67 billion ($90.1 billion).

Other prominent physical gold backed ETFs include iShares Gold Trust, Aberdeen Standard Physical Gold Shares ETF and Goldman Sachs Physical Gold ETF.

The younger generation, which may want fewer barriers to entry and more convenience, can opt to invest via digital platforms that allows them to purchase gold starting from a very low base. Singapore-based Hugo, for example, lets investors buy and sell gold at any amount starting from 1 cent.

Naylor says it is important that the gold market is increasingly accessible to the younger generation, who may see gold as old-fashioned compared to other forms of investment such as cryptocurrencies. “Our research suggests that gold is still attractive to young people in India, Thailand and Vietnam. These are the markets where there’s cultural affinity for gold,” he adds.

How gold-related players on the SGX are faring

In Singapore, there are a number of publicly-traded gold miners and retailers which may benefit from an upward trajectory in gold prices.

CNMC Goldmine Holdings, for example, is one of the gold miners listed on the SGX. It reported earnings of US$1.68 million ($2.27 million) for its 2HFY2021 ended Dec 31, 2021, on the back of a spike in gold production which boosted its cash position substantially. This is a reversal from a loss of US$2.63 million in the previous corresponding period, when production was curbed because of the pandemic.

The company also recorded a US$6.6 million increase in revenue as it produced and sold more gold at its flagship Sokor mine in Kelantan, Malaysia. Having started building two additional underground mining facilities at the Sokor mine, the company could double its capacity to 1,000 tonnes.

Besides gold, CNMC’s is building a facility that can process the ore for silver, lead and zinc, which will diversify its earnings. The plant will be able to handle about 550 tonnes of ore daily and is expected to begin trial production in the second quarter of 2022.

Chris Lim, CNMC’s CEO, calls the pandemic still a concern, but the company is hopeful that Malaysia is now in a better position to deal with it than a year or two ago. “Having weathered multiple lockdowns in Kelantan and seemingly having finally turned the corner, we are taking steps to increase gold production and to expand our portfolio of mining assets to include silver, lead and zinc,” he says.

Another Catalist-listed gold miner, Shen Yao Holdings — formerly known as LionGold Corp — on Feb 11 recorded revenue of $42.8 million for 1HFY2022 ended December 2021, thanks to higher production volumes but somewhat offset by lower average selling of prices.

For the same period, earnings reached $8.4 million, versus just $1.1 million in the year earlier period. A big chunk of the better earnings, some $6.3 million, was attributed to a one-off gain on financial liabilities.

Shen Yao’s gross profit at $4.1 million in 6MFY2022 is lower than the previous corresponding period at $10.4 million, mainly due to the increase in amortisation of mining properties and the decrease in average ore head grade.

In its earnings commentary, Shen Yao says it is “uncertain whether the gold price could be sustained over the longer term or fluctuate significantly with the fluctuation in interest rates and inflation expectation”.

The company adds: “There are also considerable challenges for the group’s operations arising from the Covid-19 pandemic. Regardless of the progress we made in 6MFY2022, it remains vital to further improve our mining operations and milling processes, aim for higher head grade and explore more business opportunities.”

Meanwhile, homegrown pawnshop chain ValueMax reported earnings of $23.1 million for the 2HFY2021 ended Dec 31, 2021, 9.5% higher than earnings of $21.2 million in the same period the year before.

As revenue from ValueMax’s retail and trading of jewellery and gold business fell by $48.2 million, the company’s 2HFY2021 revenue fell 20.5% y-o-y to $143.9 million. This figure was partly offset by the growth in revenue from its money-lending business and interest income from its pawnbroking business by $10.7 million and $300,000 respectively.

Pawnbroker Maxi-Cash Financial Services reported earnings of $6.5 million in 2HFY2021 ended December 2021, a 66% decrease from the figure reported in the previous corresponding period. Its revenue decreased by 29% to $114.1 million, primarily due to lower revenue from the trading of jewellery and branded merchandise, offset by the increase in retail sales and interest income from its pawnbroking business.

Maxi-Cash’s gross profit decreased by 8% to $41.5 million in 2HFY2021, mainly due to the sales of unredeemed pledges and trading of jewellery.

Another listed pawnbroker, MoneyMax Financial Services, posted earnings of $11.3 million in 2HFY2021 ended December, a 23.9% decrease from the previous year period. Revenue also decreased by $21.2 million or 16.5% from $128 million in 2HFY2020 to $106.8, attributed to the lower sales contribution from trading of pre-owned gold items compared to the previous period, when gold prices surged.

Cover photo: Bloomberg