Precious metal a safe haven in times of market fluctuations

Saturday November 8, 2008
A gold rush?
By YVONNE TAN


Precious metal a safe haven in times of market fluctuations

GOLD has resurfaced to claim its title as a “safe haven” for investors. Its strongest advocates say it is the best hedge against inflation as stock markets decline.

Still, given the extreme volatility across financial markets, experts are finding it difficult to predict when would be the right time to swoop in on some gold.

However, most agree that if you take a long-term view, now may just be the right time to do so. “When the dust has settled, the fundamentals of gold will once again shine through,” says a dealer.

Gold prices gained over 6% this week to hit a session high of US$768 per oz. It is lower than its two-month high of US$931 per oz hit in October but significantly higher than the 13-month low of $680.80 per oz also achieved in October - a clearly wild month for commodity prices.

In any investment, the ultimate aim is to maximise returns while keeping risks low.

“The value of gold is relatively stable and it is often a safe haven when there is uncertainty and turbulence in the currency or stock markets,” says Malayan Banking Bhd (Maybank), senior executive vice-president, head of consumer banking Lim Hong Tat.

It has, in the current credit crunch remained less volatile against most commodities and precious metals, based on data by the World Gold Council.

In the third quarter , silver, platinum and oil 22-day price volatilities had spiked to 82%, 75% and 63% respectively compared with 39% for gold, the international body said.

In normal economic conditions, gold’s best contribution to an investor’s portfolio is the fact that its price enjoys a relatively low-to-negative correlation with other asset classes like currencies, bonds and Treasury bills.


JP Morgan has raised its price forecast for gold for 2008 and 2009 on expectations investors will buy

World Gold Council head of investment, North America Natalie Dempster said that gold was “unique”, in that it was an asset that bore no credit risk, involved no counter party and was no one else’s liability.

“These are extremely attractive characteristics to investors given the current financial environment,” she said.

Gold is an asset which does not depend upon any government’s or company’s promise to repay. It is not directly affected by the economic policies of any government and cannot be “frozen” as in the case of paper-based assets.

It also is one of the most liquid of global assets as it is readily sold 24 hours a day in multi markets.

Although the price of this precious commodity has not been totally spared from the current financial tsunami, as one investor so aptly put it, “gold is gold”.

“Its price does fluctuate but many investors find it to be more stable compared to other forms of investments,” says Maybank’s Lim.


For investors who like to keep their strategy simple, they can opt to buy traditional jewellery such as chains and bracelets.

Short-term impact on the price of gold, the World Gold Council said, included a rise in the US dollar which has historically weakened investors’ demand for gold as an alternative investment, deleveraging of commodity positions, and sales (of gold) in order to meet margin calls on other assets.

“On the one hand, potential weakening emerging market growth, a rising US dollar and falling inflationary concerns all offer serious headwinds for near-term precious metals prices,’’ Hussein Allidina, an analyst at New York-based Morgan Stanley said in a report quoted by Bloomberg.

“On the other hand, the physical side remains remarkably strong with exchange-traded fund demand remaining resilient globally and bar and coin availability limited while central banks selling has almost evaporated and gold lease rates remain high,’’ she said.

JP Morgan, meanwhile, has raised its price forecast for gold for 2008 and 2009 on expectations investors will buy into bullion as a haven from risk.

It forecasts gold prices at US$904 an ounce in 2008, against a previous forecast of US$884, and at US$875 an ounce next year, up from US$854 previously.

According to Maybank’s Lim, gold investments in Malaysia can be made via the purchase of physical gold bullion in the form of gold coins or by opening a gold savings passbook account which allows account holders to invest without worrying about physical storage.

“The most popular coin is the Kijang Emas that is produced by Bank Negara. In a variety of sizes, their gold content, that is the weight and purity is guaranteed by the Government,” he says.

The purchase and resale price of Kijang Emas is determined by the prevailing international gold market price with daily market prices posted on the central bank’s website.

Via the Maybank Gold Savings Passbook Account, investors are provided with a passbook which will record all their gold trading transactions.

The passbook is also used for deposit and withdrawal purposes.

The purchase of gold here is based on the bank’s prevailing gold selling price while the withdrawal of gold will be converted into ringgit at the prevailing price of the commodity.

Account holders can withdraw their gold in cash or physical gold form.

Similarly, in April this year, Public Bank Bhd launched its Gold Investment Account that allows individual customers to purchase the commodity in 99.99% fineness at daily prices in ringgit per gram.

Alternatively, investors can make their gold investments via gold exchange-traded funds (ETFs) listed overseas.

Asia’s first gold ETF which trades like any other stock, StreetTRACKS Gold Shares was cross-listed on the Singapore Stock Exchange in 2006. It was originally listed on the New York Stock Exchange in November 2004.

The gold shares are backed by physical allocated gold bullion and are traded in US dollars.

Local investors need to open an account with foreign brokerages or certain local brokerages which facilitate overseas trading in order to trade gold ETFs.

Meanwhile, for investors who like to keep their strategy simple, they can opt to buy traditional jewellery such as chains and bracelets.

According to Tomei Consolidated Bhd group managing director Ng Yih Pyng this trend has been especially pronounced over the past year: “This is partly because gold price had been on an uptrend during this period and also because stock investments had become more risky.”

Investors either buy jewellery or pure gold bars for their investments, Ng adds.

”Gold is an option that Malaysian investors can choose as they become more savvy with the understanding of gold investment via education programmes and as access to investment becomes more convenient,” Lim says.

In this regard, the bank is planning to increase awareness on gold investments, he adds.


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