• TradePlus Shariah Gold Tracker aims to provide investment results which closely track the performance of the LBMA Gold Price AM
• Return of the Gold ETF fell for the second straight quarter during the quarter ending 30 September in line the drop in return of the benchmark
• There may be some upside to gold in 2019 stemming from safe haven flows amid trade tensions and Brexit uncertainties, potential pause in Fed’s rate hike path and stronger demand for jewellery led by bargain hunting

The Fund and Its Objective

For the quarter ending 30 September 2018, the return of the TradePlus Shariah Gold Tracker declined for the second consecutive quarter by 5.6% while the benchmark fell by 5.4% compared to a decline of 5.7% and 5.5%, respectively in the previous quarter. Since its inception on 28 November 2017, the ETF and the benchmark have declined by 9.3% and 8.5%, respectively. As for the net asset value (NAV) of the ETF, it was lower at US$0.3899 or RM1.6129 from US$0.4132 or RM1.6685 in 2Q18. The Fund’s NAV was lower at US$9.591mn or RM39.678mn in comparison to US$10.166mn or RM41.044mn as of 30 June 2018. The Manager invested 99.57% of the fund’s NAV (invested in physical gold bars), while the balance of 0.43% was kept in cash as at September 30. There was no gross distribution per unit (unchanged from the previous quarter), while the number of units in circulation remained at 24,600,000.

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 Have Rebounded Since Its Near 20-month Low in August

Since falling to its lowest level since January 2017 of US$1176.70 on August 17 2018, gold prices in USD terms have rebounded by 5.3% following boosted demand by both retail investors and consumer amid bargain hunting. Meanwhile, gold prices have also been supported by uncertainty surrounding Brexit, concerns surrounding Italy’s 2019 budget deficit proposal of 2.4% of GDP from the previous government’s proposal of a deficit of 0.8% of GDP, as well as continued trade tensions between US and China.

Year-to-date, gold prices in the USD terms declined by 4.4% mainly weighed down by the stronger US Dollar (appreciated by 5.3%) amid weaker emerging market currencies, especially the Chinese yuan and Turkish Lira, which have depreciated by 6.5% and 27.1%, respectively. Furthermore, the interest rate differentials between the US Fed and both European Central Bank (ECB) and Bank of Japan (BOJ) have also played to the dollar’s favour and weighed on gold prices. The US Fed has raised the Fed Fund Rate (FFR) by three times so far this year to 2.00-2.25% while the ECB and BOJ have refrained from raising their current interest rates. Since our initiation, gold prices have fallen by 4.3%.

In ringgit terms, gold had also risen by 6.6% since reaching a near two-year low of RM4820.33 on August 16 2018 amid the softer Ringgit which had depreciated by 1% in the same period. However, in the first eleven months of the year, gold in RM terms declined by 3.5%.

Flows Into US Gold-backed ETFs Declined

Total holdings of gold ETF in 3Q18 registered its first net outflow of 103.4 tonnes since 4Q16 driven by the outflows from US (-75.3 tonnes), Europe (-14.7 tonnes) and Asia (-10.3 tonnes). The World Gold Council attributed the outflows from the US to good performance of the US equity market. Furthermore, positive macroeconomic indicators and the stronger US Dollar had led investors away from gold ETFs during the quarter. As for Europe, limited investor activity despite concerns over the Italian budget and ongoing trade war failed to lead more inflows into the European-listed gold funds. As for Asia, most of the outflows was attributed to China-listed ETFs (outflow of 12.2 tonnes) where more speculative trades take place.

In October, total outflows had reversed to register an inflow of 16.6 tonnes following four consecutive months of outflows. Flows were mainly seen into listed ETFs in US (12.4 tonnes) and Europe (10.5 tonnes) compared to outflows of 6.1 and 10.2, respectively in September. Meanwhile, Asianlisted ETFs continued to register an outflow albeit at a slower pace of 6.5 tonnes compared to 6.7 tonnes in September.

Upside Risk

Gold prices could see some upside in 2019 following a less than stellar performance in 2018 so far. This is anticipated to arise from the Fed possibly taking a pause in its tightening path of three 25bps rate hikes in 2019 amid possibility of a slowdown in US economic growth leading to an increase in demand for gold as a defensive asset. The IMF expects the trade measures and waning effects of stimulus measures to result in a slower GDP growth of 2.5% yoy in 2019 compared to its estimate of 2.9% in 2018. Furthermore, there is also a possibility for the ECB to raise rates as guided in previous meetings where “key ECB interest rates to remain at their present levels at least through the summer of 2019”. This would narrow the interest differential between the Fed and ECB resulting in a softer US Dollar and a shift in investors’ preference away from US Treasuries to gold.

Although both President Trump and President Xi Jinping reached an agreement to not go ahead with raising the tariff rate from 10% to 25% on US$200bn worth of Chinese goods on 1 January 2019 for 90 days, this is only a suspension. If the two leaders do not arrive at an agreement at the end of 90 days, there is a possibility for the US to raise tariffs from 10% to 25%. This would then weigh on the US$ and support gold. Besides that, safe haven flows into gold may also be driven by continued uncertainty over Brexit and Italy’s budget deficit. Jewellery, which makes up about 54% of gold demand so far this year, is expected to be supported by potential bargain hunting among consumers especially during Chinese New Year while demand in India is expected to pick up towards the end of 2019 amid wedding and festive season.

Downside Risk

In 2019, if the US Fed follows through with three 25bps rate hikes, this would increase the FFR to 3.00-3.25% by end-2019. Furthermore, the Fed will also continue winding down its US$4.1trn balance sheet which will continue to put upward pressure on the US Dollar and weigh on both gold and Ringgit’s performance. Monetary policy divergence between the US and emerging market countries will also play to the greenback’s advantage. Additionally, the upside to gold may be partially offset by our stronger Ringgit projection of RM3.90/US$ by end 2019.

Source: Affin Hwang Research - 6 Dec 2018