The Malaysian Reserve

Is gold still a good buy?

Picture show Gold Jewellery Shop at SMS Deen Jewellers where there are lots of people buying a gold today at the Tunku Abdul Rahman, Kuala Lumpur (Pic By Muhd Amin Naharul/TMR)

Pic By MUHD AMIN NAHARUL

The price of gold jumping more than 6% since December may have caught investors’ attention.

The precious metal rose by US$15 (RM59.55) to close at US$1,337 a troy ounce last Friday.

Against a backdrop of increasing downside risks with higher equity prices everyday, investors have started to rekindle some speculative interest in the yellow bullion.

Market participants have attributed part of gold’s rally to a weakening US dollar, which makes the precious metal cheaper in foreign currency terms.

The year 2017 was the greenback’s worst performing year in more than a decade. The modest inflation figures in the US have weighed on perceptions of how high the US Federal Reserve (Fed) would raise interest rates, while strong economic performances in countries around the world have put the dollar in a relatively less attractive position.

Will the dollar continue to weaken?
The yield premium of US Treasuries against other developed markets is one area to consider if investors are looking for an indication of the dollar’s strength.

A higher yield premium gives more incentives for market participants to convert their assets to the dollar and invest in US Treasuries.

There is a positive correlation between yield premium against the dollar over the past 10 years.

Only recently, in the second half of 2017, did the relationship forked as the dollar’s weakness coincided with the Fed rate hikes last year.

Should the relationship remain relevant, it is likely the dollar may find some shortterm strength from the current disparity against rate spreads.

However, at last week’s meeting, most of the Fed officials have reiterated support for “continuing a gradual approach to raising the target range” for the benchmark policy rate.

Despite the price rally in the commodities space, inflation appears to be still “missing in action”, and the reason behind a slower pace of rate normalisation by the Fed.

We expect any gains on the dollar to be modest and gold price to find little support from the dollar moving forward.

It is important for investors to consider the opportunity costs associated with nonyielding assets, such as the bullion, prior to making any investment decisions. At this juncture, it is important for investors to bear in mind that the rate hike cycle is still on the cards.

Higher treasury yields have the tendency to drive bond yields higher, which also implies greater opportunity costs to investing in gold. Historically, a higher US Treasury yield translates to a weaker gold price.

To sum it up, investors who are speculating on gold may have to reconsider taking positions in the precious metal.

At this juncture, for growth investors who are searching for attractive investment opportunities, the brightest spots are lying among Asian and emerging market equities.