Has gold lost its shine?

PHOTO: Has gold lost its shine?

'Hold gold for long-term investment'

Gold has defied plenty of financial storms in the past decade or so but the shine has come off, with signs that it will end the year at a lower price than on Jan 1 - the first time this would have happened since 2001.

There is still more than a month to go before the verdict for 2013 is in, but the precious metal seems to have lost its puff.

Gold was at US$1,248 (S$1,562) per ounce last Thursday, down 25 per cent from the US$1,670 level in January.

This is a far cry from the metal's heyday in the 2000s.

In 2007, the price surged 31.7 per cent over the course of the year, after rising 23.77 per cent in 2006.

Last year, gold was up 5.86 per cent, after rising 11.31 per cent in 2011.

At its peak in 2011, gold was commanding US$1,887 per ounce.

Sunday Invest looks at gold's prospects.

Is gold losing its lustre?

Analysts say many institutional investors have been liquidating their gold holdings over the past year as confidence in the global financial system has improved, and a gold rally to rival the peaks of the 2000s is unlikely.

Mr Avtar Sandu, senior commodities manager at Phillip Futures, says large amounts of liquidity in the market over the past decade - a result of the US Federal Reserve's efforts to stimulate the economy - boosted the gold price.

The precious metal, which does not pay interest or a yield, is traditionally held as a hedge against inflation and volatility.

Low interest rates made gold attractive, as the opportunity cost of owning it is lower.

However, the commodity is now looking less appealing as higher interest rates loom on the horizon, says Mr Victor Thianpiriya, commodity strategist at ANZ.

The prospect of the US easing its massive stimulus programme had a "disproportionate downward impact" on the price this year, as some investors in gold exchange-traded funds (ETFs) "saw their key rationale for seeking a safe haven in gold fade", says Mr Albert Cheng, managing director for the Far East at the World Gold Council.

Investors are finding equities more attractive than gold "because of a perceived high return value", adds Phillip Futures' Mr Sandu.

Consumer demand still strong

Though prices have plunged this year, physical gold's status as a cultural icon in Asia means consumer demand will continue to thrive.

A World Gold Council report earlier this month showed that demand for gold jewellery was particularly strong in China, rising 29 per cent in the third quarter compared with the same period last year.

Indian jewellery demand fell 23 per cent in the third quarter, due to government measures to restrict imports as part of efforts to stabilise the rupee.

However, heading into the fourth quarter and the major Hindu festive season, "latent demand among Indian consumers remains very strong, as reflected in the persistence of local price premiums above the international gold price", said the report.

Overall global consumer demand for gold jewellery, bars and coins in the first three quarters was up 26 per cent over the same period last year.

In addition to its cultural connotations, the versatility of gold is a selling point as it can be bought in various forms, from bars to jewellery, futures or ETFs.

The popularity of gold continues unabated in Singapore.

Ms Beh Hsia Wa, director of UOB bullion and futures, says demand for physical gold has risen following the tax exemption on investment-grade gold.

The number of transactions rose 25 per cent compared with the third quarter of last year, she adds.

Mr Victor Foo, chief executive of the Singapore Precious Metals Exchange, says the exchange has seen a 40 per cent rise in the volume of physical gold purchases since its launch in July.

"Consumers are buying and accumulating while prices have been relatively low these past few months," he adds.

Ms Pamela Seow, marketing and communications manager of Poh Heng Jewellery, notes that Asian customers tend to value high-caratage gold. For instance, demand for 22-carat gold has risen more than 25 per cent over the last 5 years.

Short-term pain, long-term gain?

Factors such as this year's downward price trend, a recovering global economy and potentially better returns from equities might take some of the shine off gold but some analysts say it can still be a prudent long-term investment.

"In the short term, the bearish sentiment is hard to fight... Prices will struggle to rally in this environment," says Mr Thianpiriya.

But he is positive on gold prices over the long term, saying that for a long-term investor, "the current price might start to look attractive".

Even as demand for the metal - from both consumers and central banks - continues to pick up, supply remains relatively constrained, he adds.

Long-term investors "should look to buy and allocate a portion of their portfolio to gold" as a form of long-term wealth preservation and diversification of assets, says the World Gold Council's Mr Cheng.

"The rule of thumb would be - the higher the risk in the portfolio, the larger the share in gold should be."

Price might fall further

However, some analysts caution that gold prices might fall further in the coming year.

OCBC economist Barnabas Gan advises "caution on gold buying as an investment".

The absence of tapering this year may lift gold prices to US$1,320 per ounce by the year's end, but this is unlikely to be sustained once the Fed begins to wind down its stimulus programme, he adds.

Mr Kelvin Tay, regional chief investment officer for Southern Asia Pacific at UBS Wealth Management, says gold prices are likely to be negatively affected by the potential tapering of the US Fed's quantitative easing next year.

"We now have a reverse of the conditions that saw gold prices run up sharply... With 10-year US Treasury yields rising closer to 3 per cent, the opportunity cost of holding gold rises as gold does not pay interest," he says, adding that the price of the commodity is expected to fall further to US$1,150 per ounce by the end of next year.

Other commodities

Phillip Futures' Mr Sandu says the short-term outlook for commodities in general is bearish, given macroeconomic factors such as the threat of tapering and a slightly stronger US dollar.

Mr Thianpiriya, however, says that commodity prices are expected to improve next year, buoyed by demand from China and improving global growth.

Base metals and energy markets will be "most exposed to positive demand-side dynamics".

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