Gold price at turning point?

Is this the right time to buy gold? In August, gold price suffered one of the worst sell-downs in recent years when it fell from USD2055 per troy ounce on 7 August 2020 to USD1885 on 12 August 2020. Subsequently, gold price recovered to the USD1940 bandwidth in the following two weeks. What had caused the pull-back in gold price in early August?

Gold price smashed to record high

Year-to-date, gold price has surged by a whopping 28%. So the current correction in gold price may represent a good window of opportunity for wealth builders to buy bullion or bullion savings programs before gold price soars again. To put things into perspective, much of the increase in gold price in 2020 is attributed to the monetary stimulus measures introduced by US government in March 2020. The recent plunge in gold price in August is also largely due to the US monetary stimulus, or the lack of it in August 2020.

gold price

Against the backdrop of economy slow-down caused by COVID-19 pandemic, gold price has been in buoyant form in 2020 because the precious metal is viewed as a safe haven. So the recent correction in gold price must have confounded many wealth builders. Is this the burst of a bubble or just a healthy correction for gold price?

Gold price in golden form

In my view, there is still plenty of room for gold price to continue rising. Many countries had encountered second wave of COVID-19 infections after reopening their economies. So it would likely take at least another year or so before global economy returns to pre COVID-19 levels. Even so, this is based on the premise that a vaccine is developed by end of this year.

Due to the devastating economy harm caused by COVID-19 pandemic, the US Federal Reserves had resorted to quantitative easing in March in a bid to prevent the economy from collapsing. This approach is similar to the one it had undertaken during the Global Financial Crisis (GFC) in 2009. Broadly speaking, this means that the US government is increasing money supply, thereby debasing its fiat currency. As a result, gold price soars to high heavens because of fear of inflation.

Back in 2009, the monetary stimulus was conducted through QE1, QE2 and QE3 over the course of three years. According to Fitch Ratings Report, the Fed bought a total of USD1.4 trillion of Treasuries in 2020, exceeding the purchases in the whole of QE1, QE2 and QE3. Because of this, the rise of gold price in 2020 has been “fast and furious”. Admittedly, the explosive form of gold price had caught me by surprise as well.

In my opinion, the correction of gold price in August 2020 could be due to the lack of a second monetary stimulus in US. The Federal Reserves is hoping that besides monetary stimulus, the US government should step up the efforts in fiscal stimulus like increased government spending and tax cuts. Despite this, the stunning performance of gold price in this year had led to Warren Buffett’s Berkshire Hathaway to buy a stake in mining company, Barrick Gold, in August 2020.

Negative interest rates

The biggest criticism by naysayers of gold is that the yellow metal does not yield any dividends or interests. To this end, I do not disagree. But look at what happened to the stock market and bank savings rates at the moment. Many blue chip companies had slashed their dividends while the fiasco of Eagle Hospitality Trust vindicated that S-REITs will not be immune to financial crises.

On the other hand, holding more cash may cause more harm than good to wealth builders as savings rates plummeted to record lows following moves by US Federal Reserves to slash interest rates to near zero. At such levels, depositors are facing real negative interest rates when inflation is factored in. Furthermore, the US Federal Reserves has signalled that interest rates are likely to remain at such depressed levels until the end of 2022. So the opportunity cost of holding cash is high.

As a matter of fact, European countries like Switzerland, Denmark and Sweden had implemented negative interest rates (NIRP). This is the case for Japan as well. The banks have to pay interests to their central banks for the reserves they hold. In turn, they are faced with the choice of passing the cost to depositors by charging them fees.

In reality, very rare do banks charge savers for placing deposits with them. Rather, most banks in NIRP environment typically reduce benefits for savers to abysmal levels. Over in Singapore, I doubt the Monetary Authority of Singapore will implement negative interest rates as the monetary policy framework in Singapore is based on a trade-weighting basket of currencies. Nevertheless, with the onset of COVID-19 pandemic, the interest rates will likely to remain very low for the foreseeable future.

Given the extremely low saving rates, hoarding cash may not be ideal. But I think one should still set aside at least six months of household expenses in the bank. With retrenchments on the rise in Singapore, you never know if you may get the axe (unless you work in the civil service). Furthermore, most companies are laying off workers and freeze hiring. If you lose your job at this juncture, it may be difficult to secure a new job soon.

The golden rule is always to invest in money in which you can afford to lose. At this point, I think it is important to adopt a more defensive investment approach but also set aside some funds to grab opportunities of upside. So after setting aside the emergency fund, one of the most viable investment options that could generate decent returns are probably gold.

BullionStar

Outlook for gold price

Given the massive run up in gold price, wealth builders must be wondering if it makes sense to buy gold now. In my view, apart from the global economy downturn, the on-going geopolitical conflicts between US and China will play a major influence on gold price going forward.

The relationship between US and China is currently at the lowest point and I honestly doubt that the two countries would be able to resolve all their conflicts in the foreseeable future unless a new US President is elected in November. With a new US President, the situation may improve a little bit.

Even with a new US President, it is unlikely that US Federal Reserve will increase the interest rates for the next two years. Thus, I expect gold price to be bullish in the near term. It may even hit USD2,500 per troy ounce by end of the year.

If you are looking to ride on the booming gold price, one possible way may be buying gold exchange-traded funds (ETFs). In SGX, one of the gold ETFs is SPDR (stock code: 87) which has a return of 17% year-to-date. The investment objective of the gold ETF is simply to reflect the performance of gold price, less the fund’s expenses. Gold ETFs are generally meant for investors with low to moderate risk profiles.

Another way to build wealth with gold is buying gold bullion. If you are buying physical gold, make sure that you buy from a reputable bullion dealer. In Singapore, two of the most bullion dealers are BullionStar and UOB. The former used to offer one of the lowest prices for bullion in town. However, recent checks at UOB website revealed that the local bank is giving the bullion dealers a run for its money. Even UOB gold savings account is being offered at a lower price premium as compared to BullionStar’s Bullion Savings Program.

The main advantage of BullionStar’s (BSP) is the opportunity to convert your gold savings to physical bullion bars, produced by LBMA refineries, at any time without any extra cost whatsoever. On the other hand, UOB gold savings account cannot be converted to physical gold or gold certificates. The UOB gold savings account is also not backed by physical gold.

Conclusion

Under the current ultra-low interest rate environment, it may be worthwhile to consider buying gold if you have set aside sufficient emergency funds. While stock market may offer higher returns and dividends in the long-run, it is prudent to have a balanced portfolio. As a safe haven, gold will help to hedge against market uncertainties and mitigate the risk of inflation.

It is anyone’s guess if the US government will unleash another package of quantitative easing. Based on historical track record, it is likely that another stimulus will be unveiled in the coming days. With US printing money around the clock, inflation will likely to increase. Geo-political tensions will continue to mount, causing much uncertainties in global economy’s recovery. I view the current correction as healthy and a good opportunity for wealth builders to accumulate gold. In this regard, I expect gold price to continue its fine run till the end of the year. Till then, enjoy the ride.

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Updated: August 25, 2020 — 4:05 pm

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