24 October 2016
The gold price has rebounded while financial markets continue to suffer volatilities. Photo: Bloomberg
The gold price has rebounded while financial markets continue to suffer volatilities. Photo: Bloomberg

Invest in gold amid volatile stock markets

Gold is considered a safe-haven asset that can help diversify risks in a portfolio.

While global stock markets tumbled recently, gold investment provides a good return. The gold price has risen 5 percent since the beginning of the year, outperforming the S&P 500, Hang Seng Index and Shanghai Composite Index by 12 percent, 27 percent and 17 percent, respectively.

Besides market sentiment, the gold price is also influenced by interest rates. Demand for gold is mainly from investors and consumers.

The world’s demand for gold rose 2 percent in the fourth quarter last year. Also, central banks have been increasing their gold reserves.

For instance, China added 104 tons of gold to its reserves in the second half of 2015. The amount accounts for nearly 2 percent of the country’s total foreign reserves.

Individual investors also increased their holdings in gold bars and coins. But the demand for gold in the jewelry and industrial sectors is slowing.

The gold price has rebounded while financial markets continue to suffer volatilities. This proves that gold investment can provide returns amid market uncertainties.

As the price of gold has remained at low levels for quite some time, demand for gold jewelry may increase.

In the fourth quarter last year, total gold supply decreased 7 percent. After the mid-2011 when the precious metal reached a peak of US$1900 per ounce, the downtrend made gold miners more conservative.

Gold miners are expected to focus more on operation and cost-cutting amid instability in the financial market and valuation pressure on their shares. We expect the overall supply of gold will continue decreasing in 2016.

Goldman Sachs noted in a report that the gold price and the yield of the 10-year US Treasury are negatively correlated. The higher the bond yield, the lower the gold price.

The market has yet to reach a consensus on when the Federal Reserve will again raise interest rates.

As such, the gold price will be supported. Reuters expects it to reach US$1,200 per ounce by the end of 2016.

Physical gold, paper gold and gold ETFs are ways to seize investment opportunities in gold.

Physical gold investment has no credit or counterparty risk, but investors should be careful to keep the gold safe while the trading fee for physical gold is higher.

Paper gold involves low trading charge, and related services are generally available in banks and brokerages.

Hong Kong-listed Gold ETFs all have collateral of physical gold. The trading process is as simple as buying stocks.

Investors can avoid the safety risk in a physical gold investment while gold ETFs enjoy high liquidity and narrow bid-ask spread.

However, investors should also be cautious about where the physical gold collaterals are stored, because it may involve geopolitical risks.

Currently, there is one Hong Kong-listed gold ETF backed by physical gold stored in the precious metals depository at the Hong Kong International Airport.

The ETF has a dual-counter arrangement which have units traded in both Hong Kong dollar and the renminbi, creating channels for investors to make renminbi asset allocations.

This article appeared in the Hong Kong Economic Journal on Feb. 2.

Translation by Myssie You

[Chinese version 中文版]

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Associate Director at Value Partners Limited

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