24 October 2016
The rule of thumb is that a rate hike will strengthen the US dollar and depress the price of gold. Photo: Reuters
The rule of thumb is that a rate hike will strengthen the US dollar and depress the price of gold. Photo: Reuters

When is the right time to bargain-hunt for gold?

China’s middle-aged women, known as damas, battled with tough-as-nail Wall Street traders two years ago and won in setting a higher price for the yellow metal.

What’s happened to their investment so far?

The gold price has been falling from US$1,890 per ounce on Aug. 22, 2011, and has slumped 43 percent by July 31, 2015, when it tumbled to US$1,085.

The damas scrambled for gold in early April 2013, and their massive buying pushed up the gold price against the wishes of the Wall Street traders. However, the gold price has lost nearly 30 percent of its value over the last two years.

Still, the falling price has not scared away mainland investors. Massive crowds lined up to buy gold jewelry and bars at a shopping mall in Guangzhou on July 24, when the price of gold jewelry dropped to 252 yuan per gram and gold bar fell to 219 yuan per gram, the lowest in five years, according to local media reports.

Local gold association officials suggest that the gold price is close to the bottom, and may rebound soon if the United States raises interest rates. As such, they say, it’s a good opportunity for investors to buy physical gold.

However, the rule of thumb is that a rate hike would strengthen the US dollar, and gold usually moves in an opposite direction to the greenback. I don’t know whether the gold price may fall further, but I don’t think the rate hike would drive up gold price either.

A number of analysts encouraged bargain hunting when the gold price fell to US$1,550 in early April 2013. And Chinese damas rushed into jewelry stores and snapped up 300 tons of gold during that period.

Some media reports put up headlines like “Chinese damas beat Wall Street tycoons” to highlight their dramatic exploit.

Nevertheless, the gold price continued to fall back in the following two years, and even touched a low of US$1,085 in late July this year.

So the damas have suffered a huge loss of nearly US$4.5 billion for their 300 tons of gold over the last 27 months.

Gold is an asset that does not offer any interest. Instead, an investor has to pay storage fees. Nowadays, gold is considered a less attractive option to preserve wealth.

Can gold hedge against inflation? Data shows that gold price moves in line with the commodity price index, which just goes to show that the precious metal is an ordinary commodity.

Investors have to consider the supply and demand picture of the commodity as well as the cost of production.

Gold supply has been rising in recent years. In 2013, world’s mined gold production reached 3,028 tons while recycled gold output totaled 1,255 tons.

Last year, global gold output increased to 4,410 tons, including 3,234 tons of mined gold and 1,176 tons of recycled gold.

By contrast, gold demand dropped to 4,212 tons last year, from 4,436 tons in 2013 and 4,690 tons in 2012. Excess supply may stay for a while.

As such, gold price is unlikely to rebound anytime soon unless there is another world war or a major natural disaster.

It’s still too early to bargain-hunt for gold. Currently, its price is still US$175 above the production cost. Investors should wait until the price comes close to the cost line.

This article appeared in the Hong Kong Economic Journal on August 3.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker

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