• Gold ETF aims to provide investment results which closely track the performance of the LBMA Gold Price AM.
• Between Jan and Aug 2018, gold prices dropped to an eighthmonth low driven by the stronger US dollar
• Going forward, gold prices will still be weighed down by the strong US dollar, with expectations of possible two more US Fed rate hikes and possibly rising interest rate differentials between US and ECB and BOJ

The Fund and Its Objective

As at 30th August 2018, the NAV per Unit was RM1.6288 while in dollar terms, it was US$0.3965, falling by 4.3% since our initiation on 6th June 2018 and declining by 6.3% since the start of the year. The Fund’s NAV was RM40.32mn as of 30th August 2018, which was 7.6% lower compared to the start of the year, compared to a 7.3% lower over the same period for the benchmark. For the quarter ending 30 June 2018, there was no gross distribution per unit (unchanged from the previous quarter), while the number of units in circulation was unchanged from the previous quarter at 24,600,000. The Fund’s AUM as at 30 June 2018 was US$10.166mn or RM41.044mn (as compared to US$8.806mn or RM34.012mn as at 31 March 2018) and 99.26% of the fund’s NAV was invested in physical gold bars while the balance of 0.74% was kept in cash.

Recall that the TradePlus Shariah Gold Tracker, which is managed by Affin Hwang Asset Management, 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 will invest a minimum of 95% of its NAV in physical gold bars, while the balance is to be invested in Islamic money market instruments and/or Islamic deposits.

Gold Prices Down, US Dollar Up in First Eight Months of 2018

Although gold is normally used a hedge against international political and global economic uncertainties, the price has remained relatively flat recently with a downward bias to the price activity despite increasing trade tensions between US and China. Sanctions between US and Turkey (deteriorating Lira and economic fundamentals) due to the resurgence of the US Dollar, has not increased the risk in favour of gold as well. The depreciation of emerging market currencies led by the decline in the Turkish Lira had strengthened the US Dollar further. This led to the US Dollar Index appreciating by 3.3% in the first eight months of the year to 95.21. As a consequence, gold prices in USD terms dropped by 6.9% year-to-date, reaching its lowest since January 2017 of US$1176.70 on the 17th of August. Since our initiation, gold prices have declined by 7.2%.

The US Fed Fund Rate (FFR) was raised for the second time in 2018 by 25bps to 1.75-2.00% at its June FOMC meeting following its first rate hike earlier this year in March. The US Fed’s dot plot now shows a median expectation of the FFR to settle at 2.25-2.5% by the end of 2018, which translates to the possibly of two more rate hikes this year. The Fed’s move was attributed partly to rising inflationary pressure, which accelerated to a six and a half year high of 2.9% yoy in July 2018 (2.8% in June), while the core-personal consumption expenditure (PCE), which is the Fed’s preferred gauge of inflation reached the Fed’s target inflation rate of 2.0% in July from 1.9% recorded in June.

In ringgit terms, gold had fallen by 6.5% between January and August 2018. Since our initiation, gold in ringgit terms has weakened by 4.1%. While being impacted by the emerging market currencies sell-off and the appreciation of the greenback, the Ringgit had only depreciated by 1.5% during the same period.

Flows Into US Gold-backed ETFs Declined

As at end-August, the total gold ETF holdings have declined for fifteen consecutive weeks, the longest net selling off period by investors in five years. According to the World Gold Council, in the US, the stronger US Dollar led to the decline in gold-backed ETF flows by 20.2 tonnes compared to the outflow of 14.4 tonnes in the same period last year. In contrast, global gold-backed ETF inflows were mainly seen into Europe with a total of 44.4 tonnes in the first seven months of the year (inflow of 116.9 tonnes in JanJul 2017). Asia had also improved in the same period marked by net inflows of 5.7 tonnes (outflow of 11.1 tonnes in Jan-Jul 2017).

Downside Risk

Going forward, we believe that some downside risks are still present for gold prices in US Dollar terms in the near to medium term. One of them being the firm USD on the back of the expectations of two more expected rate hikes by the US Fed this year. Although gold is often used as an inflation hedge, the rising inflationary pressure and higher US inflation rate have somewhat failed to boost gold prices. The rate hikes by the Fed and continued winding down of the Fed’s balance sheet (of around US$4.3trn) will continue to put upward pressure on the US dollar and weigh on gold’s performance in the near to medium term. Additionally, although gold is normally seen as a safe haven asset especially during times of turmoil (i.e. trade tensions between US and China) investors have preferred US Treasuries due to expectations of the US Fed’s monetary policy normalisation. This has contributed to the current US Dollar’s gain over gold.

Another factor weighing on gold is the rising interest rate differentials between Europe and Japan after the European Central Bank (ECB) and Bank of Japan (BoJ) have stated that their monetary policies will be left unchanged for the rest of 2018. Furthermore, official gold reserves in emerging market countries account for 19% of the world’s total gold reserve as of August 2018. Therefore, the weakening demand for gold from emerging markets (EM) in favour of US Dollars amid weakening EM currencies as well as potential sell-off by EM central banks of their holdings of gold in order to defend their weakening currencies will also keep gold prices relatively flat.

Meanwhile, in ringgit terms, the upside to gold will be partially offset by our projection of a possible stronger ringgit (possibly ranging between RM3.95- 4.00/US$ by end-2018 and RM3.80/US$ by end 1H2019) supported by Malaysia’s healthy economic fundamentals, where the current account is expected to remain in surplus albeit to narrow to a range of RM30-35bn in 2018 (RM40.3bn or 3.3% of GNI in 2017). Furthermore, although foreign exchange reserves dipped to US$104.2bn as at 15 August 2018 from US$104.5bn as at end July, we believe reserves will be continually supported by BNM’s forex measure requiring exporters to convert 75% of their US$ export proceeds to Ringgit. The Ringgit projection, however, will also be dependent on development in US Fed’s monetary policy including the ongoing shrinking of the Fed’s balance sheet.

Upside Risk

Despite the US Fed’s hawkish monetary policy trajectory, the strength of the US Dollar may not hold up if there is a sharp slowdown in US economy as well as signs of trade tensions hurting US economy. This will in turn support gold prices.

Source: Affin Hwang Research - 4 Sept 2018