Highlight Is the gold rush coming to an end?

Business & Markets 2013
Written by Ben Shane Lim of theedgemalaysia.com
Friday, 26 April 2013 15:20
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After hovering between US$1,600 and US$1,800 an ounce in the past
two years, gold prices nosedived recently.
The precious metal fell 13.67% on April 12 and 15 — the sharpest
decline in almost three decades. The last time it crashed was in
February 1983, when it dropped 14% to US$408.5. At the time, the fall
in its price was preceded by a gold rush amid geopolitical risks.
The sudden decline in gold prices will probably force investors to rethink
the fundamentals that fuelled the yellow metal, which climbed from a low
of US$280 in 2003 to a record high of US$1,900 in November 2011.
“The perception of gold as a one-way upward bet in the last decade is
being severely tested now. A change will see more volatility in gold
trading,” says Gan Eng Peng, Hwang Investment Management Bhd’s
head of equities.
The recent sell-off was triggered by a slew of bad news that dampened
sentiments in the international market, for instance, fear of more central
banks following Cyprus’ intention to sell its gold reserves for debt
settlement, which would flood the market with gold bullion.
Granted, Cyprus’ gold holding of US$600 million is relatively small, but
the worry is that other debt-laden central banks — for example Italy,
which has US$90 billion of gold reserves — could be forced to pursue
the same measure to pare down debts.
Also, there is the fear that the US Federal Reserve, which is set to meet
on April 30, will roll back its quantitative easing by the end of the year.
Should that happen, the current ample liquidity in the financial and commodity markets might evaporate.
“Things were made worse by a ‘sell’ call on gold by an influential global investment bank and a slowdown in China immediately
after. That quickly turned into the rout we are seeing now,” says Gan.
“Essentially, financial investors are trying to unwind their positions, most likely exaggerated by substantial shorting of the
commodity by opportunistic funds.”
He points out that it is tough to make an “entry level call” on the yellow metal because the recent sell-off has been due to
investment fund flow, stemming from technical reasons like margin calls, forced selling and shorting of gold.
Gan reckons that the short-term trend of gold price will depend on how much some of the large financial investors out there
need to unwind their positions.
“We don’t have such proprietary information. If we were to hazard a guess, we think any correction beyond 20% in such a
period of time would be unreasonable, and that there should be some form of short-term rebound or short covering. Hence,
our call would be around US$1,300 an ounce. But we will not be putting money at risk on such a view.”
In a report, Bank of America Merrill Lynch (BoAML) says it sees the risk of gold falling another US$150 an ounce to as low as
US$1,200 before prices stabilise. The investment bank believes the price of the precious metal has yet to reach its lowest
point for the year.
The report points out that the key drivers of the rally in gold price in the past few years, for instance massive credit growth in
developed countries, have been fading.
While central banks still adopt a loose monetary policy, BoAML highlights that much of the additional liquidity has been
channelled into excess reserves instead of flowing to the international markets, such as commodities. Consequently, this
makes gold a less viable investment proposition.
Many believe gold is a good hedge against inflation. However, inflationary pressure is expected to remain muted due to idle
capacity in advanced nations, according to BoAML. It highlights that nominal rates across various maturities on the US yield
curve are expected to rise, increasing the opportunity cost of holding gold.
At the same time, gold will have to contend with a recovering global business cycle.
“Given that the business cycle moved out of recession tentatively in February, gold prices are unlikely to have seen their
lowest point this year,” says BoAML, although it expects jewellery demand to support gold prices at the US$1,500 mark in the
medium term.
Retailers are still gold bugs
Despite a growing bearish outlook for the precious metal, Malaysian retail investors see the sharp fall as a golden buying
opportunity.
“We are just a small office, but it has been like a trading floor here for the past two days [Monday and Tuesday] with people
coming to buy gold. Those who missed gold’s bull run are taking advantage of the sell-off to get in,” says Mohd Faizal Mohd
Nor, chief operating officer of Nubex Sdn Bhd, a gold trading company based in Damansara Perdana.
According to Faizal, gold sales more than doubled last week while the price of gold was still falling.
“The last time gold price fell so dramatically was back in 2008 when it tumbled more than US$100 per ounce overnight. The
difference back then was that gold prices were correcting amid a bull run. Today, however, gold is in a bear market so
nobody knows what direction it will take. While it seems cheap, there could be further downside,” says Faizal.
Another gold trading company, Gold Bullion World Sdn Bhd, has seen sales surge from an average of 500g per day to about
10kg in one day, says its chief operating officer Ritzwan Rosli.
In fact, the gold rush has been so acute that some traders have run out of stock due to a shortage of physical gold from
suppliers, according to Faizal and Ritzwan.
Among the listed jewellery retailers, those like POH KONG HOLDINGS BHD [], TOMEI CONSOLIDATED BHD [] and
DEGEM BHD [] have seen virtually no movement in their shares, which are typically thinly traded anyway.
“We have seen an increase in sales of about 30% to 40% since gold price came down. Since the inventory costs are higher,
we are selling at a slight loss. In the long run, however, this event will have little impact on earnings since we are also able to
restock our gold at low prices today,” says Poh Kong’s chief executive Datuk Eddie Choon.
Gold may be a “safe haven” asset that has performed well in the past decade, but it remains to be seen if the trend can continue should the ample liquidity dry up.