•  In the six months ended 30 June 2019, the TradePlus Shariah Gold Tracker registered a positive return of 9.62%. LBMA Gold Price AM also registered a return of 10.26%.
• Upside to gold prices may arise from the possibility of escalation of trade tensions, Brexit uncertainties, China economic slowdown and further monetary policies easing in major economies (especially in US).
• However, downside risks on gold prices may stem from a trade war resolution between US and China and a steady US Dollar

Performance of the Fund

In the TradePlus Shariah Gold Tracker’s half-yearly report for the six months financial period ended 30 June 2019, the TradePlus Shariah Gold Tracker (the Fund) registered a positive return of 9.62%, compared to the LBMA Gold Price AM (the Benchmark), which recorded a return of 10.26%. The Fund had underperformed the Benchmark by 0.64%, but a significant improvement and positive turnaround from the negative return of the Fund of -4.13% as at end June 2018.

As at 30 June 2019, the Fund’s Net Asset Value (NAV) per unit was US$0.4613 compared to US$0.4208 as at December 2018. The Fund’s NAV was at US$12.501mn or RM51.642mn. As stated in TradePlus Sharah Gold Tracker half-yearly report, cash flow during for the six months ended 30 June 2019 was US$33,566 compared to US$84,159 between 28 November 2017 to 30 June 2018 due to lower cash flows from financing activity led by higher payments for cancellation of units and lower proceeds from creation of units.

There was no income distribution or unit split declared for the financial year ended 30 June 2019. The Manager invested 99.94% of the fund’s NAV (invested in physical gold bars), while the balance of 0.06% was kept in cash. The number of units in circulation was 27,100,000. The management expense ratio was at 0.53%.

Performance of Gold in 2Q19

The higher return on both the Fund and the benchmark in 2Q19 was bolstered by the stronger performance of gold prices. In 2Q19, gold prices rose by 9.3% to US$1,413.7/oz, which was its highest level since 2013. In the first seven months of 2019, gold prices rose sharply by 11.3% to reach US$1,426.10/oz. Since our upgrade to our call from a “Hold” to a “Buy” on the TradePlus Shariah Gold Tracker in our report dated 12th February 2019, gold prices have surged by about 16.6% to US$1523/oz as of 31st August 2019. Part of the reasons for the rise in gold prices were due to its safehaven quality amid heightened risks namely the escalation of trade tensions between US and China. In addition, expectations of lower interest rates from monetary policies easing in major economies (such as the US) also caused gold prices to move higher during the quarter.

Furthermore, due to trade and geopolitical tensions as well as volatile global financial markets, according to World Gold Council, these factors caused central banks to demand for more gold as a safe haven, where central bank net purchases rose 47% yoy to 224.4 tonnes (76% to 149.8 tonnes). In 1H19, net purchases amounted to 374.1 tonnes, its highest level since becoming net buyers of gold in 2010.

Upside Risk on Gold Prices

Going forward, we continue to anticipate safe haven demand for gold to remain, with the continuation of US-China trade war tensions, where China stated it will impose additional retaliatory tariffs against US$75bn worth of US imports (with tariffs between 5% to 10%) to be imposed on two batches of US goods starting from September 1st and December 15th, respectively.

Meanwhile, in the UK, Brexit uncertainties remain as the 31st October 2019 deadline approaches. In the latest developments, UK Prime Minister Boris Johnson lost the majority support in the House of Commons after a Conservative Party MP took his seat on the opposition side. Following this, it is now possible for Member of Parliament (MPs) to force the PM to delay Brexit. A no-deal Brexit suggests that there will be no 21-month transition period where one of the main consequence is the UK would then revert to the WTO rules on trade. There is also a possibility of a snap general election before the deadline.

After a better-than-expected 1Q19 economic growth, China’s real GDP growth slowed to a 27-year low of 6.2% yoy in 2Q19 (6.4% in 1Q19) amid the ongoing trade tensions, which impacted different sector of its economy. In July, industrial production slowed to 4.8% yoy from 6.3% in June, its weakest growth since February 2012, while retail sales also slowed sharply to 7.6% yoy in July from 9.8% in June suggesting that domestic demand is slowing down in the country.

In terms of global monetary policy, monetary policies easing in several major economies will continue to support safe haven flows for gold. For example, the US Fed cut its Fed Funds Rate by 25bps to 2-2.25% in the FOMC meeting in July. Although the Fed still expects continued expansion of economic activity, it guided that “uncertainties about this outlook remain”. If the US economy continues to show more signs of weakening amid slowing global growth, we believe the US Fed may cut rates again, as early as in September. The ECB and BOJ are also likely to remain accommodative due to ongoing external uncertainties and low inflation. Meanwhile, in Asia, several central banks such as Indonesia, Philippines, Thailand as well as Malaysia have already eased their respective monetary policies as a pre-emptive measure to bolster growth.

In ringgit terms, gold prices may be supported by the softer ringgit against the USD in 2019 as short-term volatility in the financial markets in the ASEAN region remained as long as trade tensions do not get resolved. However, the ringgit will be supported by recent initiatives released by Bank Negara Malaysia to enhance liquidity and accessibility in the financial market.

Downside Risk on Gold Prices

We expect downside risk to gold prices to arise from the possibility of both US and China reaching a trade compromise. Despite the recent escalation, there may be a possibility of a trade compromise. In the latest development of trade talks, President Trump guided that both the US and China would hold trade discussions on 29th August. This also follows President Trump’s earlier statement that China has expressed its desire for a trade deal. Similarly, China had also highlighted that it is willing to resolve the trade war with a “calm attitude”. Gold prices may be weighed down by the potential for the US Dollar to strengthen despite the prospects of more US Fed rate cuts. This is potentially due to other major central banks like ECB and BOJ being more dovish compared to the US Fed. For example, Bank of Japan (BOJ) highlighted in its latest monetary policy statement that it “will not hesitate to take additional easing measures if there is a greater possibility that momentum toward achieving the price stability target will be lost”.

Source: Affin Hwang Research - 6 Sept 2019