• Gold ETF aims to provide investment results which closely track the performance of the LBMA Gold Price AM.
• Prices may be weighed down by recovery of US dollar, rise in 10-year US Treasury yield and possible dissipating geopolitical risks
• Gold prices may move higher if US dollar remains soft and assuming escalating trade tensions and geopolitical noises.
• We Initiate the ETF TradePlus Shariah Gold Tracker With a Hold.

The Fund and Its Objective

The TradePlus Shariah Gold Tracker aims to provide investors with investment results which closely track the performance of Gold price where its benchmark is the LBMA Gold Price AM. The Fund, which is managed by Affin Hwang Asset Management Berhad, will invest a minimum of 95% of its Net Asset Value (NAV) in physical gold bars, while the balance is to be invested in Islamic money market instruments and/or Islamic deposits. The Fund has a 3-month tracking error of 0.3%.

The NAV per Unit was RM1.6968 while in dollar terms, it was US$0.4276, as of 5th June 2018. The Valuation Point is the valued at the time which the LBMA Gold Price AM is quoted by IBA, ie. 10.30am (London time) which is 5.30pm or 6.30 (Malaysian time) on each Dealing Day. The Fund’s NAV was RM41.741mn as of 5th June 2018 which is 0.4% lower compared to the start of the year compared to a 0.3% lower over the same period for the benchmark.

Decline in Gold Supply and Demand in 2017

In 2017, supply of gold contracted by 4.2% yoy to 4,398.4 tonnes as compared to a gain of 5.4% yoy (or 4,590.9 tonnes) recorded in 2016, due partly to decline in net producer hedging and lower amount of recycled gold. As for demand, it dropped by 6.7% yoy led by the fall in total bar and coin demand (-1.9% yoy) due to the weak US market, ETFs and similar products (-62.9%) as well as central bank and other institutions (-4.7%). Despite the weak annual growth for ETF flows, it remained as a positive inflow for the second consecutive year at 202.8 tonnes compared 546.8 tonnes in 2016. Bulk of the ETF inflows were absorbed by European-listed funds due to geopolitical jitters amid Brexit uncertainty, rising tension between US and North Korea as well as tension in the Middle East. Also supporting European gold-backed ETFs was the negative interest rate environment in Europe. Jewelry demand rebounded by 4.0% yoy in 2017 after 3 consecutive years of negative decline led by higher demand from the jewelry’s top three markets in the world namely China, India and US.

Surge in Gold Prices in 2017

Gold prices outperformed all major asset classes in 2017 with the exception of stocks, as it surged by 13.5% to US$1,302.80/oz compared to an increase of 6.6% in 2016 and -10.0% in 2015. This was its largest annual price gain since 2010. Besides geopolitical concerns mentioned earlier, the softer dollar and lofty valuations of many asset markets contributed to buoyant gold prices.

Risk in Investing in the Fund

A few potential risks in investing in the TradePlus Shariah Gold Tracker flagged are (1) fluctuations in price of gold bars; (2) currency fluctuations; and (3) tracking error.

Downside Risk

Gold prices in US dollar terms have seen some downside so far this year, having fallen by 0.3% to US$1292.25/oz, while in ringgit terms, gold has fallen by 2.3% to RM5174.20/oz. Going forward, we believe there are certain downside risks for gold prices in in US dollar terms in 2018. One of them being the recovery of the USD, given its negative relationship with gold, following recent healthy economic data. The dollar will be further supported if the US Fed raises rates more than the number of times priced in by the market. Additionally, the potential rise of the 10-year US Treasury yield amid higher inflationary expectations on the back of a tighter labour market and higher oil prices will also lead to a stronger greenback.

Besides that, the dissipation of geopolitical risks assuming that, in particular, the trade tensions between US and China are merely short term, will restore confidence in the market. Furthermore, despite the recent renewal of trade threats between US and China, the possibility of a trade war has most likely already been priced in by the market.

Meanwhile, the upside to gold in ringgit terms will be partially offset by our projection of a stronger ringgit. The ringgit is anticipated to remain volatile in 1H18 and it will appreciate to RM3.80/US$ by end-2018, supported by steady sustained economic growth this year and expectations of higher commodity prices. Despite the recent announcement that Federal Government debt and liabilities amounted to RM1.087 trillion (80.3% of GDP) as of 31st December 2017, the Government’s reassurance of achieving the fiscal deficit target of 2.8% of GDP for 2018 through a number of measures such as reallocation of expenditure priorities, the reinstatement of Sales and Services Tax (SST), higher dividend from Government Linked Companies (GLC) should aid in making up for some revenue loss from the reduction of GST to 0% from 6%, effective 1st June 2018, thus, supporting market sentiment around the ringgit.

Upside Risk

Despite the possibility of a total of 3 or even 4 rate hikes by the US Fed in 2018 alongside its continued shrinking of its balance sheet, this may not necessarily translate to lower gold prices in USD terms. According the World Gold Council’s 2017 report, gold prices did not fall despite the Fed hiking rates in 2017. Its analysis further reveals that when real rates are between 0% and 4%, gold returns are positive and its volatility and correlation with other mainstream financial assets are below long-run averages. Although the US dollar has rebounded recently, the greenback could still remain soft in 2018 amid potential tightening monetary policies by European Central Bank (ECB) and Bank of England (BOE).

Trade tensions between the US and China will also encourage investors to shift towards gold. Furthermore, we are not discounting the possibility of this trade war to be lengthened and escalated. Additionally, geopolitical tension between the US and North Korea may also reignite if the US fails to strike a nuclear deal with North Korea.

Technical Outlook

From 2013 until early 2016, gold prices were in a long-term downtrend. Since then, prices are in an uptrend, likely to trade within tight range. A key resistance is seen at US$1350/oz psychological level which has not been breached since early 2014, and key support is around US$1050/oz level. Gold prices are making higher lows but not higher highs, forming an ascending triangle in both the daily and weekly charts, indicating a possible slight upward bias possible in the near term. Therefore, we initiate the TradePlus Shariah Gold Tracker with a hold.

Source: Affin Hwang Research - 6 Jun 2018