Prospects for gold still good for the long term

Analysts still see the precious metal as a solid choice for long-term investment.
Analysts still see the precious metal as a solid choice for long-term investment.PHOTO: REUTERS

Gold may have lost some of its lustre recently but analysts still see the precious metal as a solid choice for long-term investment.

The price sat at US$1,147.50 per ounce on Dec 30, down about 16 per cent from the 12-month high of around US$1,366 last July, amid a post-Trump surge on Wall Street and a rocketing greenback.

By last Friday it had hit around US$1,177, a 4 per cent recovery in the past three weeks.

OCBC senior investment strategist Vasu Menon does not expect 2017 to be a good year for gold, but investors should not rush to sell their holding.

"Our view on gold is not overly bullish. Looking at 2017, we think gold may end the year at around US$1,100 per ounce. But asset allocation is critical, so this shouldn't mean you need to get out of gold altogether," he said during a conference last week.

"Gold will always be a good choice for diversification, and you should always have some in your portfolio. It's almost like an insurance policy, and you never know what lies ahead."

Indeed, the traditional strategy of buying gold as a safe haven has not become invalid due to recent price movements.

Mr Geoff Blanning, head of emerging market debt and commodities at Schroders, noted the long-term value of holding gold.

He told the asset management firm's recent annual briefing in London: "Gold is much more than just a safe haven. I think gold is, throughout history, the ultimate store of wealth, the only thing that has maintained its value.

"Now, with all the worry about various geopolitical earthquakes taking place, is particularly the time to think about gold.

GOOD OPTION

Gold will always be a good choice for diversification, and you should always have some in your portfolio. It's almost like an insurance policy, and you never know what lies ahead.

MR VASU MENON, OCBC senior investment strategist.

"What's against gold now is the US dollar and higher interest rates in the US. From a sentiment point of view, maybe it's still too early to go back into the market, but the long-term prospect is extremely sound. Gold will ultimately be, as it has always been, a core element of our monetary systems again."

One factor to consider is that demand in China and India - the two biggest gold importers and, hence, a decisive driver of the gold price - will likely remain intact.

Indian demand was subdued last month, but Mr Blanning believes the country's recent policy to scrap about 86 per cent of cash value in circulation will compel buyers to look more towards gold to store wealth.

"We also see that in China, where (the yuan) is going down, the government is trying to stop people from taking their money out of the country, and the stock market is just a casino," he said.

"So what do they do? They buy gold, and that alone could drive up prices because bank deposits in China account for nearly 40 per cent of the global total."

Mr Matthew Michael, product director of emerging market debt and commodities at Schroders, said another reason to keep an eye on gold is that it has been a cheap commodity to invest in for many years.

"If you look at gold in relation to the value of other assets - say in a ratio to S&P 500 - you will see that even at the seemingly high level of US$1,300 (last year), gold prices remained very cheap compared to the 1970s," he noted.

Mr Michael believes history also offers signs that gold may be poised for a new rally.

"There is an established trend going all the way back 16 years ago. The last time oil and gold prices started to take off was when the US dollar - having appreciated for quite some time - started to weaken, to the market's surprise."

This was to be the start of the 2000s commodities boom.

That tantalising possibility awaits... should the greenback lose steam.

A version of this article appeared in the print edition of The Sunday Times on January 08, 2017, with the headline 'Prospects for gold still good for the long term'. Print Edition | Subscribe