Amid financial turmoil, is gold the answer?

Worldwide, central banks purchase gold to bolster their reserves and hedge their risks


THE majority of Malaysians do not consider themselves financially ready for retirement, an alarming reality that has been highlighted by both the country’s central bank and local pension funds.

Many look to invest in financial markets to generate additional income with their savings, fuelling the rise of robo-advisory and online brokerage services to provide cheaper and easier access to markets.

Many would also have been advised to invest in gold — an adage that has become even more relevant today amid the heightened uncertainties besieging global financial markets.

What role does gold, a precious metal, have in personal wealth management?

Kenanga Futures Sdn Bhd dealing and tech support manager, Chong Ming Wah, said gold is a non-interest bearing product but is proven to improve an investor’s overall portfolio performance.

“In an overall portfolio of investments where you have some fixed income, shares and other assets, historically it has been proved that, by having some exposure to gold, it improves the overall portfolio’s risk-adjusted return,” he said during a briefing session this week.

He added due to the attribute of gold being rare and (its recognition) by the world as a precious metal, where even central banks are trading in gold, why not we as individuals buy gold?

Worldwide, central banks purchase gold to bolster their reserves and hedge their risks.

In the first half of 2019, gold demand reached a three-year high of 2,181.7 tonnes, largely driven by central bank purchases, according to the World Gold Council.

The US has the highest gold reserves at 8,133.5 tonnes. As a comparison, Malaysia’s gold reserves stand at 38.9 tonnes. The precious and rare metal is deemed a haven asset, especially amid periods of high volatility and market uncertainties, not unlike what is occurring today due to the US-China trade war.

Note that historical gold prices peaked in 2011 during the eurozone debt crisis.

But the buck appears to stop there as gold is seen as an asset to support an existing investment portfolio as opposed to an end in itself.

Rakuten Trade Sdn Bhd VP for research Vincent Lau said investing in equities is proven to generate positive returns in the long term, but noted that gold is good to have as part of that portfolio.

“Gold has always been a haven and, in times of volatility, will see its price move,” he told The Malaysian Reserve (TMR).

“So, it would be a good asset class to hedge or trade for a specific timeframe rather than to buy and hold”.

Year-to-date, gold (based on the Comex contract) is up 17% while Malaysia’s benchmark FTSE Bursa Malaysia KLCI is down 5.1% over the same period.

Pheim Asset Management Sdn Bhd CEO and CIO Leong Hoe Kit said gold is an excellent store of value as it typically generates high returns relative to other investment instruments amid times of financial turmoil.

“But the reality is, this is because other investment instruments, including cash, are actually experiencing value depreciation relative to gold, hence the increase in the value of gold,” he told TMR.

“So, unless there is a doomsday scenario with prolonged financial markets turmoil, I would say that over the long term, an adequately diversified balanced investment portfolio would outperform gold in terms of returns.”

Fortune will thus favour the savvy investor over the relentless gold hoarder, but investing in gold has an important part to play in balancing any investment portfolio.

Today, investors do not need to purchase physical gold but can instead trade gold contracts and gold-based exchange traded funds (ETFs).

In Malaysia, this comprises the Gold Futures (FGLD) contract traded on Bursa Malaysia Derivatives Bhd and the TradePlus Shariah Gold Tracker ETF, both of which provide easier access for individuals looking to invest in gold while incurring zero storage costs.

Leong said these new instruments increase market access to gold while creating more liquidity in gold trading.

“Market liquidity for gold is also enhanced as it becomes much easier and faster to transact gold with these new instruments compared to transacting physical gold,” he said.