Quarterly Market Outlook
In Greek mythology, King Midas, one of the last three members of the royal house of Phyrgia, is remembered for his ability to turn everything he touched into gold. That’s a myth, of course, but isn’t every legend based on some fact? Even back in Ancient Greek times, gold was so valued that Midas wished for the golden touch.
Things haven’t changed much today, in that aspect. Intraday prices of gold have touched record-high levels over the past few weeks, evidence of investors rushing to place their money in what is traditionally a safe haven. The second wave of Covid-19 cases and expensive stock valuations, along with near-zero interest rates and forecasts of increased inflation in the near term have further bolstered gold’s valuation against the dollar this year.
What’s been pushing the performance of gold? The main driver behind gold's rally has been falling returns on US government bonds, which reflect the likelihood that the Federal Reserve will have to keep interest rates lower for longer to support the economic recovery. This situation is mirrored in almost every other economy, including Malaysia. While it may seem counter-intuitive to buy gold when it is relatively expensive, there are many underlying reasons why you should do exactly that.
Gold is an ideal medium as investors won’t have to worry about not getting interest on their holdings, compared with traditional interest-bearing products.
Gold prices are expected to rise even further as uncertainty in markets increases, said Mark Mobius on an interview with Bloomberg TV1, recently. Mobius is co-founder of asset manager Mobius Capital Partners.
Year to date, gold prices have increased 25%, compared with the same period last year. Bank of America forecasted in April that prices could almost double to USD3,000 by the end of 2020. 2
If things continue the way they are now, the dollar could soon be making way for the gold-backed superyuan. In its attempt to oust the US from its current dominant trade position, China will need to build up its yuan and its best bet is to back its economy with gold instead of bonds.
In April, the president of the Shanghai Gold Exchange (SGE), predicting a decline in the US dollar4, called for a new super sovereign currency to offset its global dominance. China’s push for recovery after Covid-19 will lead to an increase in demand for resources, adding to the incentive of pricing in a currency other than the dollar.
The dollar is currently used in 88% of all currency trades and accounts for about 62% of the world’s foreign exchange reserves.
In July, Goldman Sachs wrote that the U.S. dollar may soon lose its status as the world’s reserve currency.5 Goldman Sachs’ strategists wrote: “Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge.”
Debt levels in the US have exceeded 80% of the country’s GDP, leaving room for inflation to rise above the Federal Reserve’s 2% target.
As at Aug 5, 2020, approximately USD1.95 trillion worth of Federal notes is in circulation6, up from USD1.8 trillion in December 2019. The current Trump administration is showing little concern in this area and as a reaction, investors are taking up gold futures. In August, gold prices breached the USD2,000 mark.
The explanation is simple: a monetary response which leads to inflation creates a surplus of dollars. A surplus of dollars leads to a depreciation of the currency. A depreciation of the dollar leads to an appreciation in the value of gold.
This understanding can be placed in a Malaysian context: interest rates are at an all-time low, flushing more liquidity into the economy as debt is increased. The government’s debt levels7 as at Q2 2020 stand at RM1.26 trillion. In Q2 2020, Malaysia saw a GDP contraction of 17.1%, the worst since the 1998 crisis.
Choppy waters are expected ahead, but gold has always proven itself to be a strong performer in the past. When the going gets tough, the tough buy gold.
Based on the charts we can see that gold, which is priced in US dollars, has an inverse relationship to the currency and is a strong hedge during times of economic crisis. With this in mind, some of the world’s largest economies have been stockpiling gold in anticipation of the tough times ahead. The US is having a harder time keeping the virus in check, which will lead to its economy under-performing and unemployment levels increasing.
The vaccine for Covid-19 is still in development and there are doubts over how successful it will be as the virus mutates and newer strains become resistant. The country is the largest holder of gold reserves, at 8,133.53 metric tonnes as of March 2020. Germany, a key economy in the European Union, is second with 3,364.18 metric tonnes of gold in its reserves.
Gold has maintained its position as a safe investment vehicle, even through market dips, compared with other forms of investment. Year-to-date, it has outperformed other traditionally “safer” investments such as government bonds, yielding returns in the high teens.
In the past during recessions and wars, currencies would decline in value and gold became the primary form of hedging. The current US-China tensions paint a slightly different picture - in the sense that it is an economic cold war - but the outcome is expected to be the same, with demand in gold as a safe haven increasing.
Gold is a unique asset, highly liquid, but scarce and limited. It is a luxury good and can be considered an investment opportunity, carrying little to no currency risk while being highly liquid. Stocks benefit from economic growth and stability while gold benefits from economic distress and crisis. During periods of market stress, gold is able to reduce portfolio losses by outperforming most other assets. It is also able to protect investors’ purchasing power through its ability to hedge against high inflation and currency devaluation.
During the 2008-2009 global financial crisis, the Standard & Poor 500’s capitalisation declined by 56.8%, while gold performed well, increasing 25.5%. Although the value of gold dropped initially in early 2008, this in fact created a buying opportunity and eventually pushed its value upwards.
You can either buy physical gold and keep it, or invest in “paper gold” to diversify your portfolio. What’s the major difference? The value of gold goes up and down and changes with the market but is never worth nothing. You’ll have a tangible asset. Physical gold is just that: gold in the form of coins, bars or jewellery. With paper gold, you don’t own the gold; you own a promise to receive physical gold. You are a creditor of the corporation issuing the paper gold certificate.
There isn’t one “best” way to hold gold. It all depends on your goals and strategy. Your portfolio should be structured in a way that helps you reach your long-term goals. Gold should be part of that portfolio, with the amount held depending on your risk profile.
RHB offers you the opportunity to diversify your portfolio and invest in gold in a paper statement form via the RHB MCA (Multi Currency Account) Gold Investment facility. With this facility, you can benefit from the potential increase in gold prices without having to buy and sell physical gold. You can also invest in up to 17 foreign currencies under the same account, offering the best overall hedge against inflation.
Demand for gold is increasing, pushing mining companies to ramp up production of a resource that is becoming rarer and more difficult to mine. As gold prices go up, profit margins for mining companies will increase. This opens up opportunities to invest in mining companies, which you can do through the RHB Gold and General Fund. This fund allows you to invest in selected mining companies that not only mine gold, but other precious metals and base materials.
While there is no surefire way of predicting how the markets will behave, it’s always a smart move to have at least a little bit of gold in your portfolio.
Contact your nearest RHB branch and our advisers will be happy to help you decide which investment best suits your needs.
As central banks diversify their monetary reserves—away from the paper currencies that they’ve accumulated and into gold—the price of gold typically rises. Global central banks are now increasing their gold reserves.
Hedge against US Dollar:The price of gold is inversely related to the value of the US Dollar. A weaker dollar is likely to push up the price of gold.
Jewellery and Industrial Demand:Gold prices can be affected by the basic theory of supply and demand; as demand for consumer goods such as jewellery and electronics increases, the cost of gold can rise. Gold is an essential metal in the production of electronic components. The US, India and China contributed to half of gold demand in 2019, or 4,400 tonnes.
Wealth protection:When the expected or actual returns on bonds, equities, and real estate fall, the interest in gold investing can increase, driving up its price. Gold can be used as a hedge to protect against economic events like currency devaluation or inflation. In addition, gold is viewed as providing protection during periods of political instability as well.
Investment Demand:Gold also sees demand from exchange traded funds that hold the metal and issue shares that investors can buy and sell.
Gold mining:Gold is becoming increasingly difficult to mine, as “easy” sources are depleted. It costs more to get gold, which increases its value.
1 Business Insider: Legendary investor Mark Mobius says keep buying gold even as it approaches record highs, Ben Winck, July 24, 2020
2 Bloomberg: Gold to reach $3,000 – 50% above its record, Bank of America says, Elena Mazneva, April 21, 2020
3 GoldHub: Gold mid-year outlook 2020, July 14, 2020
4 Kitco: Gold futures in blue sky territory as china rolls out the e-RMB, David Erfle, August 14, 2020
5 Bloomberg: Goldman warns dollar’s role as reserve currency is at risk, John Ainger, July 28, 2020
6 Board of Governors of the Federal Reserve System
7 The Edge Markets: The state of the nation: More flexibility as statutory debt threshold raised to 60% , Cindy Yeap, August 17, 2020
Hedge against inflation by investing in Paper Gold and Paper Silver.
Get in touch with RHB Premier today.
This publication has been prepared by RHB Bank Berhad and is solely for your information only. It may not be copied, published, circulated, reproduced or distributed in whole or part to any person without the prior written consent of RHB Bank Berhad. In preparing this article, RHB Bank Berhad has relied upon and assumed the accuracy and completeness of all information available from public references and articles or which was otherwise reviewed by RHB Bank Berhad. Accordingly, whilst we have taken all reasonable care to ensure that the information contained in this article is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness or fairness of such opinions and make no representation or warranty (whether expressed or implied) and accept no responsibility or liability for its accuracy or completeness. You should not act on the information contained in this article without first independently verifying its contents.
Any opinion, historical account, personal profile, estimate or data contained in this article is based on information available as of the date of this article and are subject to change without notice. It does not constitute any advice, offer or solicitation by RHB Bank Berhad. This document and its contents are not intended to constitute an offer for sale and/or invitation to subscribe for or purchase or otherwise acquire any of the instruments referred to herein.
Disclaimer for Video and Podcast by RHB Asset Management:The podcast provided herein is solely for information purposes only. It does not take into account the specific investment objectives, financial situations or particular needs of any particular person.
This podcast does not constitute an offer, solicitation or recommendation to buy or sell or subscribe for any security or financial instrument or to enter into any transaction or to participate in any particular trading or investment strategy. Information contained in the podcast should not be relied upon when making investment decisions. You should seek independent legal or tax advice before making any investment decisions. Investments are subject to investment risks, including the possible loss of the principal amount invested. Value of the investments and the income, if any, may fall or rise.
No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein and it should not be relied upon as such. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance.
Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same. RHBAM does not guarantee that all risks associated to the transactions mentioned herein have been identified, nor does it provide advice as to whether you should enter into any such transaction. The contents hereof may not be reproduced or disseminated in whole or in part without RHBAM’s written consent.
This podcast has not been reviewed by the Securities Commission Malaysia. You should not act on the information contained in this podcast without first independently verifying its contents.
Disclaimer for Video and Podcast by Economics and Market Strategy:This report is prepared for information purposes only by the Economics and Market Strategy division within RHB Bank Berhad and/or its subsidiaries related companies and affiliates, as applicable (“RHB”). All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness.
Neither this report, nor any opinion expressed herein, should be construed as an offer to sell or a solicitation of an offer to acquire any securities or financial instruments mentioned herein. RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for any direct or consequential loss arising from the use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose without prior consent of RHB and RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for the actions of third parties in this respect. Recipients are reminded that the financial circumstances surrounding any company or any market covered in the reports may change since the time of their publication. The contents of this report are also subject to change without any notification.
This report does not purport to be comprehensive or to contain all the information that a prospective investor may need in order to make an investment decision. The recipient of this report is making its own independent assessment and decisions regarding any securities or financial instruments referenced herein. Any investment discussed or recommended in this report may be unsuitable for an investor depending on the investor’s specific investment objectives and financial position. The material in this report is general information intended for recipients who understand the risks of investing in financial instruments. This report does not take into account whether an investment or course of action and any associated risks are suitable for the recipient. Any recommendations contained in this report must therefore not be relied upon as investment advice based on the recipient's personal circumstances. Investors should make their own independent evaluation of the information contained herein, consider their own investment objective, financial situation and particular needs and seek their own financial, business, legal, tax and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.
RHB (including its respective directors, associates, connected parties and/or employees) may own or have positions in securities or financial instruments of the company(ies) covered in this research report or any securities or financial instruments related thereto, and may from time to time add to, or dispose off, or may be materially interested in any such securities or financial instruments. Further, RHB does and seeks to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities or financial instruments of such company(ies), may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant banking, advisory or underwriting services for or relating to such company(ies), as well as solicit such banking, advisory or other services from any entity mentioned in this research report.
RHB (including its respective directors, associates, connected parties and/or employees) do not accept any liability, be it directly, indirectly or consequential losses, loss of profits or damages that may arise from any reliance based on this report or further communication given in relation to this report, including where such losses, loss of profits or damages are alleged to have arisen due to the contents of such report or communication being perceived as defamatory in nature.
This podcast has not been reviewed by the Securities Commission (SC) and/or Bank Negara Malaysia (BNM).
RHB Bank Berhad 196501000373 (6171-M)
