• Gold ETF aims to provide investment results which closely track the Performance of the LBMA Gold Price AM.
• Gold prices have been on a steady rise since the data was published on the effects of the trade war
• Moving forward, there would still be some downward pressure arising from the steady US$ but as fear rises gold would be a strong beneficiary

The Fund and Its Objective

As at 31st January 2019, the NAV per Unit was RM1.7760 while in dollar terms, it was US$0.4338, rise by 0.6% since our initiation on 6th June 2018 and increasing by 2.4% since the start of the year. The Fund’s NAV was RM45.466mn as of 31st January 2019, which is tracking similarly to the benchmark at 3.2% YTD. Over the 3-month period the fund has returned 7.5% compared to an 8.6% return on the benchmark over the same period.

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.

Mounting Fears From Chaos Rising

In the initial months of the Donald Trumps’ trade wars, the market had been relatively stable throughout. Many saw opportunities that could have been taken advantage of with the imposition of tariffs upon China. However, as the trade war loomed on, data on the effects of the trade war were published and it had evidently taken a toll upon global demand and slowing production.

The grimmer outlook painted by many US companies during their quarterly briefings shed even more light upon these effects of the trade and bubbled up fears amongst investors. Exacerbated by the growing instability in the European Union with Brexit and the fracas between populist governments and the European Central Bank; we can observe an increase in fear amongst investors with the increase in the VIX index (Fig 2). The VIX index is slowly reaching levels where the 2015-2016 Oil Crisis took place and almost halfway to the 2008-2009 financial crisis.

Furthermore, the decreasing oil prices despite efforts by OPEC+ to reduce global oil supply, is one of the many indications of an overall weakening global demand. All these factors prey upon investors’ risk appetite as the risks stemming from these uncertainties do not justify their investments in equities, which has us heading into a bear market or bear market territory.

The Golden Net of Security

Where risks in equities have increased, gold will find a pedestal whereupon most investors would turn to in this time of turmoil. Over the past 2 months in October - November, there has been a gradual shift in the inflows of gold purchases throughout the globe. The increase of demand for gold has risen the gold price steadily over the 2-month period and we anticipate that the rise in gold prices would continue over the next few months moving into 2019. One of the reasons that we anticipate the persistent rise in gold price is firstly, due to the US’ terms for China to protect the US companies’ IP and halt forced technology transfers continue to put pressure upon the US – China trade negotiations. Secondly, the raising of the interest rates by the Fed despite their more dovish outlook in 2019 would continue to put downward pressure upon investors’ outlook.

Thirdly, the recent partial shutdown of the US government exacerbates the downward pressure of investors’ risk appetite as the partial shutdown could possibly lead to a full government shutdown should President Trump fail to negotiate with the Democrats in Senate to pass his government funding bill which includes an appropriation of US$5 billion towards his border wall past the 15 February 2019 deadline.

Lastly, China’s reported economic growth falling to 6.6% for the year 2018 has sent jitters up the market’s spine as China’s growth is currently at its lowest since 2010. The 2019 outlook for China is estimated to be weaker as the World Bank cut their estimates from an expected 6.5% to 6.2%. While the IMF cutting their growth outlook by 0.2%, it would stand to reason that the economic climate is very uncertain.

Coupled with the factors above, should a trade deal not be reached between the US and China within the 90-day truce, we foresee it positively impacting gold prices as investors would shift towards buying gold to safeguard their wealth.

A Shift in Demand and Strong Growth Outlook

As we began 2019, we saw a shift in the demand for gold and its related instruments as the stated uncertainties above began to worry investors. In Figure 3, we observed that the gold-backed ETFs had a net inflow while a trend of heavy US outflows reversed in December. Furthermore, as observed in Figure 5, we can see that the demand for gold has risen yoy by 2%.

There has also been a gradual increase among developing nations to purchase gold, with the Russian Federation increasing its gold holdings by almost 200 tonnes in 3 quarters since the end of 2017 while Turkey had begun to increase its holding of gold in light of its currency crisis. While China and India have not increased their gold holdings significantly, with the current economic and political uncertainty their respective central banks could undertake a round of gold buying to boost their holdings.

Downside Risk

Moving forward, we still believe that there are some downside risks which would continue to put pressure on gold prices over the medium term. One of which is the strong US dollar. While the raising of the interest rates by the Fed did contribute the growing investor uncertainty, it also contributed to an upward pressure upon the US dollar and the US treasury bill. This comes as investors also opt for an interest bearing investment vehicle that would better hedge against inflation.

Another factor weighing on gold is the rising interest rate differentials between the US and both Europe and Japan. Bank of Japan (BoJ) will likely maintain its current monetary policy in 2019 due to its weak inflation outlook while the European Central Bank (ECB) has guided that expected to maintain interest rates through the summer of 2019 and longer if necessary.

Meanwhile, in ringgit terms, the upside to gold will be partially offset by our projection of a possible stronger ringgit of RM3.90 by end-2019 supported by Malaysia’s healthy economic fundamentals, where the current account is expected to remain in surplus. Furthermore, foreign exchange reserves rose to US$101.7bn as at 15 January 2019 from US$101.4bn as at end December 2018, therefore, we believe reserves will be continually supported by BNM’s forex measure requiring exporters to convert 75% of their US$ 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.

Lastly, the supply of gold is steadily growing as we observed in Figure 7 which would put some downward pressure on gold prices in the short-term. We opine that this trend will continue on a steady pace as demand grows from parties ranging from Central Banks to ETFs.

Source: Affin Hwang Research - 4 Feb 2019