Still Some Upside to Gold Prices in 2020

• For the financial period ended 31 December 2019, the TradePlus Shariah Gold Tracker registered a positive return of 17.4%, compared to the LBMA Gold Price AM, which recorded a positive return of 18.8%. The Fund had only underperformed the Benchmark by 1.4%.
• There are still some upside to gold prices from uncertainties surrounding progression of trade tension talks, slower global growth, accommodative monetary policies in major economies, and concerns amid Covid-19 outbreak.
• We introduce our fair value of RM2.30 for TradePlus Shariah. We maintain BUY on the ETF.

The Fund and Its Objective

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. The minimum creation/redemption basket is 500,000 units.

Performance of the Fund

In the TradePlus Shariah Gold Tracker’s annual report for the financial period ended 31 December 2019, the TradePlus Shariah Gold Tracker (the Fund) registered a positive return of 17.4%, compared to the LBMA Gold Price AM (the Benchmark), which recorded a return of 18.8%. The Fund had only underperformed the Benchmark by 1.4%. Since the commencement of the Fund, it has registered a positive return of 14.6% compared to the Benchmark of 17.7%. With a tracking error of 0.11%, the Fund has met its objective of providing investors with investment results which closely track the performance of Gold price.

As at 31 December 2019, the Fund’s Net Asset Value (NAV) per unit was US$0.4942 compared to US$0.4208 as at 31 December 2018. There was no income distribution or unit split declared for the financial year ended 31 December 2019. The Manager invested 99.91% of the fund’s NAV in physical gold bars, while the balance of 0.09% was kept in cash. The Fund’s AUM was US$11.223mn while the number of units in circulation was 22,710,000. The management expense ratio was at 1%.

Strong Performance of Gold in 2019

In 2019, gold has surged by 18.9% yoy to US$1,523.1/oz compared to a decline of 2.1% in 2018 to US$1,309.3/oz. This was the fastest rise in gold prices since 2016, when uncertainties stemming from US elections as well as a vote for Brexit supported inflows for safe haven demand then. In 2019, uncertainties surrounding US-China trade war talks, Hong Kong protests, Brexit developments and tensions in the Middle East throughout most of 2019 and recent Covid-19 outbreak and global policy rate cuts (especially by the US Fed) have continued to support gold prices during the year. Due to geopolitical concerns and low interest rates, the World Gold Council noted that holdings in gold-backed ETFs hit an all-time high of 2,885.5 tonnes in 4Q19 compared to 2,858.8 tonnes in 3Q19 mainly from North American and European-listed funds.

Upside Risk on Gold Prices

In 2020, we anticipate safe haven demand for gold to be in view of economic uncertainties, due to a possible renewed trade talks between US and China, and negotiations may not progress past the ‘Phase one’ trade deal towards a ‘Phase two’ deal in the near term. In addition, the US has not rolled back the 25% tariffs on US$250bn worth of Chinese imports which were previously imposed. Therefore, this may continue to weigh on business sentiment. In addition, uncertainties leading up to the US Presidential elections in November 2020 may also be an upside risk for gold prices. Besides that, if the US economy slows further in 2020, this would weigh on the US Dollar.

In terms of global monetary policy, there is a possibility for monetary policy easing and accommodative monetary policies by major central banks to continue in 2020. For instance, the US Fed recently delivered an emergency 50bps rate cut to 1.00-1.25% in order to mitigate the negative impact of the Covid-19 outbreak. Furthermore, the recent expansion of the US Fed’s balance sheet since September 2019 to US$4.16trn as at endJanuary through short term repo operations and purchases of US Treasury bills will weigh on the US dollar performance as well. We believe the US Fed will likely cut Fed Funds rate further in the next FOMC or 1H2020 scheduled meetings (17-18 March, 28-29 April, and 9-10 June 2020), even though some market observers expect no further easing of monetary policy. As for the ECB, its monetary policy is expected to remain accommodative after it lowered the deposit rate by 10bps to a record low of -0.5% from - 0.4% and restarted bond purchases of 20bn euros a month from 1 November 2019. Recently, IMF cautioned that global GDP growth will be revised lower in its next World Economic Outlook report for 2020, possibly lower than the 2.9% recorded in 2019, due to expectations that China’s real GDP growth may slow sharply this year. In the near term, we believe concerns over the recent Covid-19 outbreak will likely continue to drive safe haven flows into gold. The spread of the virus especially if infections increased and continues outside of China, the heightened uncertainty may lead to higher gold prices in the near term.

In ringgit terms, gold prices may be supported by the softer Ringgit against the USD in 2020 as we expect Ringgit to weaken to RM4.20/US$ by end2020. However, the Ringgit will continue to be supported by the country’s current account surplus and healthy level of foreign reserves.

Downside Risk on Gold Prices

We believe uncertainties to be further mitigated especially if trade talks proceed further to a Phase two deal possibly before the US elections in November 2020 and if the US decides to roll back tariffs which were previously imposed. Besides that, we believe that if the Covid-19 outbreak slowdowns by 2Q20, this will lead to an improvement in business sentiment and a resumption of the global supply chain which will support global economic growth. In addition, if the US Fed and other central banks in major economies begin to tighten their respective monetary policies, this would also put some downward pressure on gold prices in 2020.

Gold Outlook for 2020 and Fair Value

In 2020, as we anticipate more upside risk especially from sustained accommodative monetary policies among major central banks especially the US Fed, uncertainties due to US-China trade tension talks continue, potential risk of the Covid-19 outbreak and other geopolitical concerns, we expect gold prices to average higher. Therefore, we introduce our fair value of RM2.30. We maintain BUY on the ETF.

Source: Affin Hwang Research - 6 Mar 2020