21 October 2016
Gold is a better bet than banks in the present economic climate. Photo: Bloomberg
Gold is a better bet than banks in the present economic climate. Photo: Bloomberg

Investors should bet on gold rather than mainland banking stocks

The price of gold has surged in recent weeks.

By contrast, the price of crude oil has fallen off again after Saudi Arabia, Russia, Venezuela and Qatar agreed to freeze the output of oil at Jan. 11 levels. The market had expected cuts.

Iran is likely to discuss freezing its oil production after it manages to ramp up its oil output back to pre-sanction levels.

However, Iran may struggle to increase oil production substantially, as it’s difficult to attract new investment at the current oil price.

Also, the country has lagged far behind its rivals in ramping up capacity.

As a result, the news drove the oil price up from US$26 per barrel to a high of US$31.50 per barrel on Tuesday.

However, freezing output rather than massive output cuts was agreed only by four countries, of which Russia and Venezuela have been hit hard by currency depreciation. Other oil producers are still on the sidelines.

US inventories of crude oil remain close to 503 million barrels, the highest level in 80 years, recent figures from the US Energy Information Administration show.

The rapidly increasing inventories reflect the robust growth of the US oil industry.

The country’s oil output has reached historically high levels, although the oil price has slumped to US$30 per barrel from US$107 in June 2014.

Such high oil stock indicates that some key oil warehouses are already grappling with capacity and logistics limits, according to Goldman Sachs analysts. These warehouses almost reach the full capacity. The investment bank predicts that oil price may tumble below US$20 per barrel before oil market returns to balanced supply and demand.

Global oil tanks are likely to be fully utilized at the end of June, and balance in the oil market may come back in the second half of this year, Bob Dudley, chief executive officer of BP, said.

The oil market is likely to remain range-bound.

By contrast, the price of gold has rebounded quickly from below US$1,200 per ounce.

It’s a good buying opportunity, as the gold price eased again Tuesday after hitting US$1,263 last week.

The price of gold has already come out of the woods, and the yellow metal is likely to surpass US$1,400 per ounce sooner or later.

The easing strength of the US dollar and negative interest rates in Europe and Japan will both benefit the price of gold and gold mining stocks.

Investors who bet on gold could escape the effects of sluggish economic growth and get exposure to recovering asset prices.

These are much better bets than mainland banking plays.

The European Central Bank will announce its monetary policy on March 10, and eurozone government bond yields have already slumped to record lows.

Traders are expecting further monetary easing measures.

Government bonds with yields below negative 0.3 percent have jumped by more than one-third to US$1.22 trillion since the last monetary meeting Jan. 21.

Falling oil prices and market turmoil may prompt the ECB to expand its monetary stimulus measures to fight deflation.

The deposit rate could drop 0.1 percentage point at the March meeting.

Investors should sell some stocks before the ECB meeting on March 10.

And they should place some bets on gold rather than putting money in banks at negative interest rates.

This article appeared in the Hong Kong Economic Journal on Feb. 17.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist of the Hong Kong Economic Journal

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