A golden safe haven in uncertain times

Gold prices rally amid greater market volatility and as the Brexit referendum draws near

In recent weeks, investors seeking refuge against financial volatility have seen their gold investments rally, boosted by factors such as the United States Federal Reserve's cautious outlook, as well as Britain's upcoming Brexit referendum.

From the end of last month through to the close of last Thursday, the price of gold has gained 6 per cent in Singapore-dollar terms.

In addition, the unit price of the largest physically backed gold exchange-traded fund (ETF) in the world - the SPDR Gold Shares ETF - similarly gained 6 per cent.

Three gold mining plays listed on the Singapore Exchange (SGX) have all headed north during the same period, averaging a 19 per cent return.

BREXIT

Gold's history of maintaining a low correlation to most other asset classes is a key reason for including it in a portfolio, says the World Gold Council. Its research has suggested that when investors add risky assets to their portfolios, gold should
Gold's history of maintaining a low correlation to most other asset classes is a key reason for including it in a portfolio, says the World Gold Council. Its research has suggested that when investors add risky assets to their portfolios, gold should have made up 2 per cent to 10 per cent of the portfolios. PHOTO: BLOOMBERG

The recent gold rally coincided with increased volatility across equity and debt markets, and the fast-approaching referendum to determine if Britain will stay in or leave the European Union.

The referendum on Thursday has a direct impact on politics, economics and financial markets.

Views have differed in recent weeks on what the effect a "yes" vote will have on the regulation, finance, trade, investment and migration policies of Britain, which is the world's fifth-largest economy.

This has upped the level of uncertainty in the global stock market. More uncertainty has led to more volatility in financial markets.

The British pound has weakened against the US dollar, while European bond yields have fallen, with Germany's bond yields showing new record lows and Swiss 30-year bond yields dipping into negative rates for the first time as well.

In the most recent edition of Gold Investor published by the World Gold Council, consultant John Nugee, former chief manager of reserves at the Bank of England, noted that gold may prove its worth, whatever the outcome of Britain's referendum.

GOLD DIVERSITY

As an asset class, one of gold's attributes is to be a potential portfolio diversifier for global investors.

In previous publications, the World Gold Council's research has suggested that when investors add risky assets to their portfolios, gold should have made up 2 per cent to 10 per cent of the portfolios.

More specifically, for portfolios made up of 60 per cent equities and 40 per cent fixed income, the research suggested a 5 per cent to 6 per cent allocation to gold to effectively manage portfolio risk.

The World Gold Council maintains that a key motivation for including gold in a portfolio has been gold's history of maintaining a low correlation to most other asset classes. In recent years, the process of portfolio construction has been made more efficient with ETFs that track the indexes of stock, bonds and gold. For instance, the SPDR Gold Shares ETF has an investment objective of tracking the performance of the price of gold bullion.

SPDR GOLD SHARES ETF

The SPDR Gold Shares ETF was listed on the SGX in October 2006 with the intention of lowering many of the barriers, such as access, custody, and transaction costs, that had traditionally prevented investors from investing in gold.

From October 2006 to the close of June 11 this year, the SPDR Gold Shares ETF generated an annualised return of 6.2 per cent.

Like an active stock, it typically trades with a narrow bid-ask spread. An example of a typical bid price and offer price could be US$122.40 to US$122.50.

Also like stocks, the SPDR Gold Shares ETF is now designated an Excluded Investment Product (EIP), accessible to retail investors without requiring any pre-qualification on their financial background and knowledge.

The rule of thumb is that if the ETF is an EIP, it implies the ETF is less complex and less risky.

For the usage of Central Provident Fund (CPF) monies, other than the first $20,000 in the CPF Ordinary Account (OA), which cannot be used for investment purposes, investors can place up to 10 per cent of investable OA savings in the SPDR Gold Shares ETF.

Not surprisingly, the SPDR Gold Shares ETF has been the most actively traded SGX-listed ETF this year.

GOLD-MINING PLAYS

There are more than 100 gold miners listed across the Asia-Pacific.

The majority of these listings are in Australia, followed by China.

However, there are also listings in Hong Kong, the Philippines, Singapore, India, Indonesia and New Zealand.

SGX lists three gold-mining plays - Wilton Resources, CNMC Goldmine Holdings and Anchor Resources. Of the trio, Wilton Resources has the largest market capitalisation at $143 million, followed by CNMC Goldmine Holdings at $134 million and Anchor Resources at $32 million.

All three stocks are listed on the Catalist board, which caters to high growth and a correspondingly higher risk profile, compared with established firms listed on the mainboard.

From the start of this month to the close of Thursday, the share price of Wilton Resources had gained 12 per cent, CNMC Goldmine Holdings had gained 28 per cent and Anchor Resources had gained 17 per cent.

Both Anchor Resources and CNMC Goldmine Holdings have mining and production facilities in Malaysia, while Wilton Resources is conducting exploration activities in Indonesia and has yet to commence gold production.

In its latest quarterly results, Wilton Resources noted that its board remains focused on the commencement of gold production at the Ciemas Gold Project.

The price of gold rose above US$1,300 an ounce in the week ending June 11, which represented a 22-month high.

• The writer is SGX's market strategist and author of the weekly SGX My Gateway Report. For a comprehensive explanation on ETFs, please visit www.sgx.com/etf

• Please note that the above is not an offer or solicitation to buy or sell, nor is it financial advice or recommendation in relation to any investment product.

A version of this article appeared in the print edition of The Sunday Times on June 19, 2016, with the headline 'A golden safe haven in uncertain times'. Print Edition | Subscribe