• Gold ETF aims to provide investment results which closely track the performance of the LBMA Gold Price AM
• Amid continued global economic uncertainties in 2019, investors are likely to use gold as a hedge against these risks
• There would still be some downward pressure arising from the steady US$ but as fear rises (assuming if trade war tension escalates) gold would be a strong beneficiary

The Fund and Its Objective

As at 8th February 2019, the NAV per Unit was RM1.7482, an increase of 0.5% since end December 2018. However, in dollar terms, the NAV per Unit was US$0.4229, increased by 0.4% since our initiation on 6th June 2018 and a rise of 2.2% since the start of the year. The Fund’s NAV was RM44.754mn as of 8th February 2019, which is tracking similarly to the benchmark at 2.3% YTD. Over the 3-month period the fund has returned 6.8% compared to a 7.2% 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.

Weak Performance of Gold in 2018

In 2018, gold prices in US$ declined by 2.1% to end at US$1,281.30 per troy ounce as at end-December 2018, following an increase of 13.7% or US$1,309.30 per troy ounce in 2017. This was also its first yearly decline since 2015. Meanwhile, in Ringgit terms, gold prices rose slightly by 0.2% in 2018 compared to the 2.4% rise in 2017. Despite the presence of global economic uncertainties, partly attributed to US-China trade tensions, gold prices failed to show gain from these events due to the stronger US Dollar seen throughout the year. In 2018, the US Dollar Index had appreciated by 4.2% compared to a decline of 6.2% in the previous year.

A Shift in Demand and Strong Growth Outlook

However, the demand for gold was notably robust in the second half of 2018, growing by 12.8% yoy to 2,336 tonnes, compared to a decline of 3.8% yoy and 2,009 tonnes in the first half of 2018. This was seen with the large increase in demand for gold by central banks and other institutions due to heightened geopolitical and economic uncertainty present throughout the year. Higher demand was also recorded for investment while jewellery demand slowed in 2H18. As for gold-backed ETFs, according to data by the World Gold Council (WGC), we observed that total global inflows had slowed to 68.9 tonnes in 2018, due to outflows from North American-listed funds as well as Asian-listed funds. For example, outflows from North America were stemmed from the strong performance of US equities, healthy domestic US economy, where GDP had expanded by 3% yoy in 3Q18, its fastest growth since 2Q15. As for Asian-listed funds, the outflow in 2018, mainly registered in 2H18, had been driven by investors possibly taking profit after the fall in China’s stock market and the weaker yuan against the USD. Meanwhile, European-listed gold ETF funds were the only ones to register an inflow in 2018, which may be attributed to political uncertainty in the region, negative yields on sovereign debt and highly-rated corporate bonds. Similarly, the rise in gold prices towards the end of 2018 and uncertainty amid the US-China trade war tension also fuelled demand.

The Golden Net of Security

So far, since early 2019, gold prices have remained on an upward trajectory reflecting a rise in the demand for gold. In January 2019, the price of gold rose by 3% mom (from 5% in December), making this its fourth consecutive month of positive increases. This follows a steady decline in gold prices registered since April 2018.

Moving further into 2019, amid continued global economic uncertainties, investors are likely to use gold as a hedge against these risks. Among the uncertainties that we anticipate may see investors flocking towards gold as a safe haven, will possibly be from the US-China trade war tension, if escalates. Although the trade war is currently on a 90-day truce which is set to end on March 2nd 2019, President Trump had recently stated that he would not meet with President Xi Jinping before the deadline, leaving some uncertainties over the outcome and impact from the level of tariffs after the deadline. In addition, fears among investors are also being exacerbated by the growing instability in the European Union with Brexit, as the 29 March 2019 deadline approaches. Fig 2 in this report showed fear amongst investors in 4Q18, with the increase in the VIX index. The VIX index had almost reached levels where the 2015-2016 Oil Crisis took place, as well as the 2008-2009 financial crisis at the end of December 2018. Although VIX index has since retreated, these uncertainties may continue to instill some fear in investors.

Second, at the latest US Fed FOMC, the Fed guided that “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate” implying that the Fed may lower its forecast from two rate hikes in 2019. Third, political risk arising from the possibility of another shutdown of the US government (if happen later this year), after the 35-day government shutdown that ended 25 January 2019, which could also weaken investor’s risk appetite. Fourth, investors will likely continue to shift towards gold as a hedge against risk amid slower 2019 global growth projections. This has been guided by the World Bank and IMF. The World Bank expects global growth to ease to 2.9% in 2019 from 3% in 2018, citing moderating international trade and investment, while trade tensions remain high and financing conditions are tightening. The IMF revised its 2019 outlook down to 3.5% from 3.7% in 2018, citing trade tensions and financial market sentiment as the key risks to its outlook.

Downside Risk

Moving forward, there are some downside risks which would continue to put pressure on gold prices over the medium term. One of which is the US dollar strength due to the interest rate differentials between the US and both Europe and Japan, even if we factor in the US Fed carries out one or two rate hikes in 2019. Bank of Japan (BoJ) will likely maintain its current monetary policy in 2019 due to its weak inflation outlook while the 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 some projection of possible stronger ringgit by end-2019, supported by Malaysia’s healthy economic fundamentals, such as the ample current account surplus, steady economic growth and healthy reserves level. Foreign exchange reserves rose to US$101.7bn as at 15 January 2019 from US$101.4bn as at end December 2018. We also believe reserves will be supported by possible capital inflows into the region, as well the improvement in compliance rate arising from BNM’s require conversion of foreign currency export proceeds (i.e. 75% of their US$ export proceeds to Ringgit).

Source: Affin Hwang Research - 12 Feb 2019