Good as gold
Gold is back! From a 20-year low of US$252 in Auagust, prices of theprecious metal have shimmied up to about US$322 an ounce. Analysts agree that the worst is over. Is it time to go in? GENEVIEVE CUA takes a close look at the future of gold.
UNTIL recently, any talk about investing in gold would have made you seem like an oddity, a throwback to the days long gone when people hoarded gold in the face of war and other calamities. Why look at gold when the stellar gains in equities markets over the last 12 to 15 months have completely eclipsed the precious metal?
Well, the fortunes of the few investors who have held on to their gold have changed, and how dramatically! With prices currently hovering at around US$322 an ounce, gold prices have climbed roughly 28 per cent in just about three weeks, since it plunged to a 20-year low of about US$252 an ounce in August.
While analysts fight shy of fund manager Marc Faber's prediction that gold could hit a stratospheric US$600, they agree that the metal has seen its worst days and could easily test the US$350 level.
So what has changed for this precious metal, and what place should it have in your portfolio?
Says Albert Cheng, the World Gold Council's area manager for Asia: "It's a good time to think about getting into gold ... Gold has bounced back, but it's still in the early stages."
Gold has always been alluring, dating back centuries ago when it was used as a form of currency. As an investment asset, it's traditionally viewed as a hedge against inflation and currency fluctuations, as its value has remained relatively stable through time.
It's precisely because of its unique characteristics -- it's indestructible, relatively scarce and there's little correlation between its price and stock markets or currencies -- that some investors are considering converting some of their assets into gold. Of late, some are seeing it as a safe haven in case the Y2K bug causes banking and financial systems to crash.
Says UOB Asset Management's Alfred Wong, who manages the United Gold & General unit trust: "I think people who buy gold on the Y2K angle are ill-informed ... But I do think the Asian crisis has taught people the importance of diversification. Those who were burnt put all their money into property, stocks or currencies. I'd argue that gold is an important asset class ... it's a form of hard currency, and is a benchmark by itself."
Mr Wong maintains that in the interest of diversification, investors should keep up to 5 per cent of their portfolio in gold. UOBAM's United Gold & General is the only unit trust here investing in producers of gold and precious metals.
During the Asian crisis, however, if you had held gold, your gain at that time wasn't in terms of the metal's capital appreciation but in terms of its US dollar value. Gold is priced in US dollars. At a time when the region's currencies were shot to pieces, you could have sold your gold and gained as much as 100 or 200 per cent in terms of the US dollar's appreciation against your local currency.
Until recently, the prospect of any capital gain seemed non-existent. Gold prices had been weighed down by the prospect of massive selling by the world's central banks of their gold reserves. Central banks hold about a third of the world's gold reserves. Switzerland, for instance, had planned to sell 1,300 tonnes, and the Bank of England, which recently held its first gold auction, intended to gradually sell more than half of its reserves.
The gloom lifted suddenly in late September, when 15 European central banks -- including England and Switzerland -- pledged to limit the sale and lending of their gold reserves for five years. Since then, gold prices have shot up as producers, investors and commodity traders rushed to buy gold and cover bets that prices would drop.
Says UOBAM's Mr Wong: "I'm quite optimistic about gold. Compared to other assets, gold has been lagging. But it is now being aggressively re-rated ... The ECB's move has addressed the demand-supply situation."
The ECB's decision to sell 2,000 tonnes of gold over five years, at a rate of about 400 tonnes a year, brings the price of gold back to its fundamentals, says Mr Cheng. Annual gold demand is estimated at about 3,000 tonnes. With annual new gold production at 2,500 tonnes, the shortfall of roughly 500 tonnes is satisfied by central bank sales as well as scrap gold.
"To date, the gold market has been depressed by central banks' intention to sell their gold reserves. Although in reality they didn't sell, market participants used their statements to push down the price which fell to 20-30-year lows. But now this element has been removed...
"It's very transparent now. Gold prices will now depend on demand and supply. If people feel nervous about financial markets and want to put money into gold, this creates demand and prices will respond. If the jewellery market produces better designed products, consumers will buy more, and naturally there's more demand...
"Demand in the last quarter was still dampened by the Asian crisis, and had not come back to pre-crisis levels. We know economies are picking up. I anticipate a surge in demand in the later part of this year," says Mr Cheng.
The World Gold Council's Singapore office tracks demand for gold in 10 Asian countries. Its latest available figures for the second quarter show that demand in Asia has shot up by 50 per cent with the strongest surge in Indonesia and South Korea, the countries hardest hit by Asia's financial crisis. Demand, however, was still at 80 per cent of pre-crisis levels.
There are a few ways you can get into gold. The CPF Investment Scheme allows investors to put up to 10 per cent of their investible sum into gold, which would be in the form of gold savings accounts with the major local banks. Using cash, you can also buy gold coins or wafers or gold certificates, or even gold jewellery, all of which have resale value.
But before you rush out to buy gold coins, there are some things you should bear in mind. There is no interest income in gold. The big question now is the potential for capital gain, and with the recent surge in prices, investors are advised to wait for a correction.
DBS vice-president (treasury) Donne Lee says: "With the recent move above US$300, you're drawing some investment play. But in any investment you must look at potential for capital appreciation and the income stream. Gold doesn't give you any income stream. I see the current level of US$320-US$322 as fair value for gold. In the medium term I don't see dramatic upmoves in gold prices."
Mr Lee believes currencies like the euro offer better returns. "I don't see much potential in gold unless you go into gold coins with commemorative value and of limited mintage, so that the coin appreciates over time."
Gold prices, says UOBAM's Mr Wong, are unlikely to fall to the low seen in August. He reckons a good entry point would be between US$300 and US$315, which offers a possible upside of roughly up to 16 per cent, if prices find support at US$350, which some analysts believe is likely.
Says a UOB spokesman: "Investors would be able to make reasonable returns in gold now, due to the increase in volatility, and the liquidity provided by the bigger players. One should be proactive when investing in gold -- when opportunities for capital gains arise, they should be seized upon. A prudent investor could consider allocating 5 to 10 per cent of his portfolio in gold."
In any case, as gold is likely to be just a small portion of your portfolio, it's worth a closer look. Y2K bug aside, gold is haven of sorts, and that should be welcome in any portfolio.
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