Should you go for gold or not?

Should you go for gold or not?

Global demand for gold was already strong in the first quarter before the recent dip in prices, and market fundamentals remain robust.

A report released last Thursday by the World Gold Council - the market development organisation for the gold industry - showed that the appetite for gold jewellery continues to grow.

Global demand for gold jewellery rose 12 per cent in the first three months of the year over the same period last year, driven by India and China.

Demand in China was up 19 per cent on the same period last year, hitting a record 185 tonnes. Demand in both India and the Middle East was up 15 per cent.

Central banks remained significant acquirers of gold, making purchases in excess of 100 tonnes for the seventh consecutive quarter.

Last month, gold suffered its biggest plunge in three decades, hitting a low of US$1,380.29 (S$1,733) and setting off a buying frenzy.

After a brief rebound, gold prices dropped to a new low of US$1,374.26 last Thursday.

The Council's managing director of investment Marcus Grubb said the fall in prices, fuelled by non-physical moves in the market, should be put into context.

Sales of gold bars, coins and jewellery and consumption in the technology sector still make up 81 per cent of the market, he said.

Gold bar and coin sales in the first three months of the year were up 22 per cent year on year in China and 52 per cent in India.

Globally, gold bar purchases rose 8 per cent; official coins (such as American Eagle and Canadian Maple Leaf) were up 18 per cent.

"What these figures show is that even before the events of April, the fundamentals of the gold market remain robust, with growing demand in India and China, central banks consistently adding gold to their reserves and strong buying of investment products such as gold bars and coins," said Mr Grubb.

Still, total global demand in the first quarter was 963 tonnes, down 19 per cent from the previous quarter.

Coutts' chief investment officer for Asia and the Middle East, Mr Gary Dugan, said quantitative easing (QE) by central banks - which undermines confidence in currencies and makes gold more attractive as an asset - is still prevalent.

QE involves interest rate cuts and bond purchases by central banks to stimulate the economy.

Despite that, the likelihood of gold prices staying below US$1,400 per ounce (S$62 per gram) in the coming week "is turning into a real possibility", he said.

Gold prices have been on a declining trend since the year began as inflation remains below expectations despite central bankers' attempts to spur spending, said Phillip Futures strategist Simon Teo.

"There is therefore very little interest among investors now to buy gold as a hedge against inflation," he said.

Gold has been hit also because investors are buying into an improved global economic outlook and snapping up riskier assets such as equities.

Mr Teo said gold - often bought as a hedge against uncertainties or when investors are risk-averse - is losing its "safe haven" status.

He added that the bearish outlook for gold is likely to continue and "we could see gold touching US$1,200 by the end of this year".

chiaym@sph.com.sg


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