Savvy investors adding to their gold and silver holdings as dark clouds loom on the economic horizon

By Lee Min Keong

The spot price of gold touched US$1,700 in early March, a level last reached seven years ago. Though it has since dipped as global stock markets started to unravel, gold remains a safe haven for astute investors.

Gold has been on an upward trend over the past few years as as demand for it continues to grow among individual investors, institutional funds, and gold-backed exchange traded funds (ETFs).

Even national banks are getting into the act with the World Gold Council reporting that central banks bought a historic high of 374.1 tons of gold in the first half of 2019. The central banks of Russia, China, Turkey and Poland have been busy accumulating gold.

In Malaysia, the appetite for physical gold has also seen a significant rise in recent times with several gold bullion companies such as Public Gold and Silver Bullion Sdn Bhd, and gold trading digital platform HelloGold confirming a rise in gold purchases even before the equity market mayhem intensified in March.

Don’t put all your eggs in one basket

As one of Malaysia’s largest bullion dealers, Silver Bullion has seen an increase in orders for gold in its Malaysian operations recently. “Not just gold but silver and platinum too,” says its manager Bryan Teh.

He adds there  has also been an increase in enquiries about its state-of-the-art storage facility in Singapore as investors start to realise the meaning of “do not put all your eggs in one basket”. “This relates to not putting all your assets in just one country as political instability and changes in monetary policy can easily restrict access to your assets.”

Bryan Teh

While demand for gold and silver in general has always been there, Teh says people are more aware of the economic situation around them compared to before.

“We strongly believe this increase in demand came from people noticing that not just Malaysia’s economy but the global economy is beginning to show cracks. Ever since the trade war between US and China started, it has taken a toll on the global economy.

“The final nail in the coffin was when the Covid-19 cases came to light and became a global pandemic which made people rush to gold and silver as they are safe haven assets,” he says, explaining when there is a higher degree of fear in the market, investors will often rush to these safe haven assets.

“Astute investors on the other hand purchase gold and silver no matter whether the markets are in greed or fear mode as they understand that the current global financial system is a ticking time bomb. Why? It’s simple – currently the global debt is standing around US$255 trillion with the US leading at roughly US$23 trillion.”

Likewise, Public Gold has also seen demand for its gold products such as bars and coins increase from quarter to quarter at around 30%, says Datuk Wira Louis Ng, founder and executive chairman of PG Group of Companies.

“Yes, Public Gold has been seeing an increase in orders for its gold products recently compared to previous quarter as the gold price is moving higher and higher. Gold, which used to be at US$1,300 to US$1,400 per ounce, is now around US$1,600,” says Ng.

Datuk Wira Louis Ng

On the driver for rising gold demand, he says the the Covid-19 pandemic coupled with the current turmoil in the global financial markets, including in the US, means that gold products are seen as “safe haven assets”.

To add to that, many central banks in the world are slashing their interest rates due to the financial crisis. “This gives gold buyers more reasons to purchase gold, as gold always performs inversely compared to the other financial classes in the world,” says Ng.

HelloGold also confirmed it has seen “a significant uptick” in its gold transactions in the last three months, says its CEO and co-founder Robin Lee.

Robin Lee

He says there are two key factors driving this increasing demand. This first is greater brand awareness of the HelloGold app amongst the investing public and greater recognition of the affordability of getting access to gold through its mobile app platform.

The second factor is the the upward momentum in the gold price since its launch in 2015, and specifically over the last few months, he adds. “At a global level, the flight to safety as a result of the ongoing outbreak of Covid-19 has led to a general risk reassessment of the equities markets, as investors consider the possibility of lower global growth and higher global inflation. And, at a domestic level, the recent weakening of the ringgit since the new year,” he adds.

New high for gold this year?

What some factors that could drive a further upward trend in gold prices?

Lee believes the chances of gold breaking its all-time high are increasing for a number of reasons. “Generally, the equities markets have enjoyed their longest bull run and most market commentators believe they are overdue a correction.

“Secondly, geopolitical risks remain high in many parts of the world – impact of Brexit on Europe, US/Rest of the World trade tensions remain largely unresolved and, at best, held in abeyance; and the US elections at year end.

“More specifically, we believe that the longer the Covid-19 outbreak continues unabated, the bigger the impact it will have on the global economy – in the worst case, we see a 1970s-style recession,” he adds.

The extreme volatility in global markets recently has also affected the spot price of precious metals like gold and silver, which dropped just like it did during the 2008-09 global financial crisis.

Lee explains that a major correction in global equities is more likely to follow what happened during the 2008 global financial crisis. “Gold price initially dipped – by common consensus, that was driven by investors liquidating gold to meet margin calls in other positions and to generate liquidity.

“Thereafter, gold climbed as investors moved into gold as a safe haven asset. In short, we believe that a global equities crash will likely drive gold prices up rather than down,” he adds.

During the height of the 2008 crisis, the spot gold price fell from about US$1,000 an ounce to around US$730. It then started bouncing back and rising as stock markets bottomed out. Gold prices rose further as the economies recovered, peaking at its all-time high of just over US$1,900 (in US dollar terms) in 2011. So will this scenario play out again in the coming recession?

Getting the allocation right

So what percentage of their portfolio should ordinary investors be allocating to gold, especially in times of market turbulence?

“Generally speaking, we believe that everyone should hold gold – not so much to make money but more to mitigate the impact of losing money (like a hedge / insurance against inflation, currency weakness, market stress),” says Lee.

For this reason, he believes that an allocation between 5% and 15% in gold is something that everyone should consider, especially in these times of market uncertainty. That said, according to research by the World Gold Council, the amount of gold investors should have in their portfolio should be a function of how conservatively or aggressively they have constructed their portfolio, he adds.

“For example, at the aggressive end of the spectrum, where a portfolio only has 6% in fixed income and the rest in equities and alternative investments, their research indicates that a 10+% gold allocation optimises the highest risk-adjusted return.

“At the other end, a conservative portfolio that is two third in fixed income and the rest in equities and alternative investments is optimised with a 2+% allocation in gold,” says Lee.

To Public Gold’s Ng, ordinary investors’ portfolios should contain 8% to 15% of gold. “This will help them to maneuver their way through the crisis that we are seeing in the stock markets currently. Gold should be in every portfolio to protect them from unexpected events.”

This article appeared in the April 2020 issue of Smart Investor.

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