News Column

Gold looks good, but is it?

February 16, 2014



The metal stumbled last year, suffering its worst fall since the early 1980s. But diminished value can open new opportunity. Tom Arnold reviews four of the options for those wanting to gain exposure

Gold's 12-year bull run ended dramatically in 2013. Long considered a safe asset, its investors would have lost 28 per cent of their investment. The price finished the year at US$1,202.30 a troy ounce for its sharpest fall since 1981. But with bullion advancing 3.2 per cent last month, its first monthly gain since August, some observers believe gold may recapture some of its glimmer in the long term. "Investors in gold for the very long term have never lost," says Jean-FranÇois Lambert, the global head of commodities and structured trade finance at HSBC. Here are four ways to go about it:

1. Physical exposure to gold

For centuries, investors have succumbed to the allure of gold bars and jewellery, partly for the look, feel and touch of the yellow metal.

But gold's attraction has also become increasingly connected to its perceived status as a store of value against volatility and rising inflation. Since the price drop last year, buying opportunities have opened up for people wanting larger exposure in the long term.

"More people are buying 24-carat gold bars rather than jewellery as they're more affordable than they were a year ago and people expect the gold price to rise again in the long term," says Harsh Joshi, the manager of the gold souq in The Dubai Mall's branch of International Jewellery.

In the UAE, there are a variety of souqs and shopping centres where people can buy jewellery and gold bars across a range of prices. There are also several ATMs that have sprung up where people can snap up 1, 5 and 10-gram bars. Still, there can be strings attached with buying physical gold in large bulk. Investors buying large quantities will need to pay to store it and insure the holding.

2. Options contracts

Options for trading in gold have swelled in recent years as banks and other financial service providers have sought to meet rising demand from investors for alternatives to owning the physical commodity.

The Dubai Gold and Commodities Exchange (DGCX) allows investors to buy gold futures, in other words giving them the option to buy or sell gold electronically at an agreed price in the future. Buyers can purchase a minimum contract valued at US$1,400 to begin trading. They can buy a call option if they expect the underlying futures price will go higher or a put option if they expect the underlying price will move lower.

A typical contract on the DGCX is two and a half months, says Pradeep Unni of Richcomm Global Services, a Dubai-based international commodity services company. As the gold price has stumbled from recent highs, investors have spied buying opportunities. Gold futures on the exchange grew by 5 per cent last month from December to aggregate 38,531 contracts.

"There has been a pickup in bargain-hunting as prices are 32 per cent from their highs," says Mr Unni. Gold futures are a popular way for wholesale traders of the precious metal in Dubai and across Asia to hedge their exposure to fluctuations in prices.

In an effort to further cement the emirate's position as a centre for gold trading, DGCX plans this year to launch a spot gold contract.

3. Gold mining stocks

At a time when the metal's prices are in the doldrums, buying mining stocks might appear an unappetising investment for many.

Investors in gold miners through the S&P/TSX Global Gold Index would have lost 50 per cent of their investment if they had stayed in across the year. That is in comparison to a 28 per cent slide in the metal's price. With the outlook for gold at best mixed for this year, pouring fresh investment into gold mining stocks this year may be unwise.

"Mining stocks are even more risky than investing in ETFs [exchange-traded funds], says Arjuna Mahendran, the chief investment officer at Emirates NBD Wealth Management.

"You have to contend with lots of moving parts like labour and energy costs."

Mr Mahendran cites the risk of gold miners facing similar troubles to those that have beset the platinum mining industry in South Africa in recent months. Platinum producers such as Anglo American Platinum have been hard hit by a spate of strikes that have affected output.

Still, many miners trimmed costs since the end of last year, a move that some analysts say has made them more attractive to investment. Goldcorp is one gold producer highlighted by analysts because of its focus on growing cash flows. The company's stock is up 16 per cent so far this year.

4. Exchange-traded funds

ETFs have risen in popularity in recent years as a convenient and low-fee way for people to trade financial markets. ETFs are a security that track stocks, commodities or bonds but trade like a stock on an exchange.

Gold ETFs aim to track the price of gold. The largest physically backed gold ETF is SPDR Gold Shares, which trades in New York, Singapore, Tokyo, Hong Kong and Mexico.

Among the advantages of such funds is that they are generally a cheaper way for investors to get exposure to the metal without physically holding it.

But those investing in ETFs have to beware pitfalls. "You have to be careful that the fund has physical gold against the purchase," says Mr Mahendran. "Sometimes they don't buy physical gold, they buy futures in gold which are not terribly correlated with gold. The risk is that they might lose money even if gold is going in the right direction."

Investors can also choose to gain exposure to gold mining stocks through ETFs. Funds such as the Market Vectors Gold Miners and Junior Gold Miners offer a broader way to benefit from gains in the industry than a bet on single stocks.

The outlook for prices

"We are close to the bottom," Mr Mahendran says.

"But in our view, gold prices could fall further to just below $1,100 an ounce this year. Gold is a hedge against inflation as when paper money is losing value gold comes into to its own.

"With all central banks printing money willy-nilly it is sloshing around the place looking for investment avenues such as gold. It raised price levels, particularly in emerging markets. As central banks end that process, prices have come down.

"In the short term, we face another conundrum as prices are rising again at a low level because of high employment. Despite the trillions of dollars that have been printed most of that money is sitting on corporate balance sheets and not been invested in new capacity and creating new jobs," he says.

As a result, there was a danger of deflation and inflation rates turning negative.

"If that transpires, it is not good for gold. If we do see that, I would start buying gold aggressively as then inflation could rise again. If we do see inflation picking up in the next two or three years as interest rates come up to 8 to 10 per cent that could be supportive of gold," Mr Mahendran adds.

tarnold@thenational.ae


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Source: National, The (United Arab Emirates)


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