Has gold rally finally lost its shine?

by SHAZNI ONG / pic by BLOOMBERG

THE heightened interest in gold counters may not be over yet as the shiny yellowish metal remains an attractive asset class to investors worried of the debasement of currencies and times of uncertainty.

Bank Islam Malaysia Bhd economist Adam Mohamed Rahim said the recent price action in gold is tied to the US technology stocks’ recent fall which has hit investor sentiment, but expected that to change as uncertainty over the US election reinvigorates demand for the metal as a haven.

“The election may renew investors’ focus on inflation, government debt and the need for stimulus. Gold could also get an added lift from a win by Democratic presidential candidate Joe Biden, who is seen as likely to raise taxes and increase spending,” he said.

The price of gold, which reached a record high of US$2,075 (RM8,653) a troy oz last month, has stumbled in recent weeks, hampered by signs of stabilising economies and a surge in equities. The precious metal was priced at US$1,923 (at press time), down some US$7.50 in intraday trade yesterday.

“Gold counters such as Poh Kong Holdings Bhd and Tomei Consolidated Bhd have taken a breather reaching record highs in August, but we reckon some catalyst in the next few months,” he told The Malaysian Reserve (TMR) yesterday.

StashAway co-founder and CIO Freddy Lim said the concern of many investors regarding the dilution of paper money from massive money printing conducted by global central banks this year has led to the rise in demand for gold.

“There is a long road ahead for economies to truly recover from the Covid-19 shock, so you can say this demand for gold as a hedging tool is medium to long term in nature.

“We view gold as a good asset class for portfolio insurance and protection against the dilution of paper money,” he said.

He added that the Covid-19 pandemic has led to the massive monetary stimuli by central banks and opined that gold’s price is going to be more sensitive to the latter than to whether the pandemic eases or not.

In mid-December 2017, StashAway, Lim said, made a strategic move to increase the gold allocation in its portfolio composition when it was trading around US$1,240 per oz.

Over the last two years, with two market corrections in 2018, the trade war in 2019 and the market crash in March this year, gold demonstrated its purpose as a portfolio hedge.

“Despite the run-up in gold prices, in our most recent (and third) reoptimisation in May 2020, we again increased gold allocations across all of our portfolios,” he said.

Gold is also viewed as a protective asset that offers protection against the dilution of paper money.

Lim believed gold demand is likely to remain for the longer term because it will take economies and societies quite some time to adjust to the impact of the pandemic.

“Economic recovery will take time. Central banks will likely need to wait for the recovery to be well established before tightening their monetary policies. Although investors are not paid dividends or returns by investing in gold, gold functions as one risk management tool that protects your portfolio against extreme events ahead of time,” he said.