Gold - the first stop in turbulent times
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The capital market in 2011 was marked by risks and uncertainties.
In the first quarter, Japan’s tsunami and Fukushima nuclear crisis sent shock waves through the global automotive and electronic supply chains. In April, the uprising in Libya sent oil prices skyrocketing to $110 a barrel, the highest level since 2008. And in the third quarter, the European debt crisis brought a major sell-off of stocks around the world.
These risks and uncertainties translated into volatility in financial assets. Stocks, while showing decent price performance in the first half of 2011, closed 2011 in the red. The MSCI World Index lost 7 per cent of its market value.
Bonds, on the other hand, rallied quite impressively in the last quarter, following a negative return in the first three quarters. Despite the market turbulence, gold emerged as a clear winner with a 10-per-cent gain during the year. More impressively, gold has been trading up every single year for the past 11 years. Will it be able to continue its winning streak? We believe so, as we identify three dominant themes that will support the gold price well into 2012:
1 Gold as a hedge against “tail-risk”.
By tail-risk we mean events that would wreak devastation in the financial market, such as the break-up of the euro currency bloc or a war between Iran and the West. While the probability of such events is quite low in our view, the risk of them occurring will support the gold price, as investors continue to hold on to the safe-haven yellow metal.
2 Gold as an alternative currency.
Since the US sub-prime crisis in 2008, the developed world has been plagued by debt. The US, Japan and France lost their highest level of credit worthiness as a result of rising government debt. Even worse, holding these currencies is yielding almost no interest, as interest rates have been kept close to zero to stimulate the economy. Investors and central banks will look to gold as an alternative to debt-laden currencies for its ample liquidity and price performance track record.
3 Increasing demand for gold jewellery from Asia. It is no secret that Asians love gold as it symbolises wealth and social status. China and India are the world’s largest consumers of gold jewellery.
We believe that gold jewellery demand from Asia will continue to rise because steady economic growth in Asia means more people will be able to afford it, while the strength of Asian currencies against the dollar makes gold cheaper to Asian consumers.
Entering the Dragon year, Asian stocks remain our favourite asset class as they are trading at an attractive valuation with good growth prospects. Hang Seng China Enterprise Index (China H-shares), for example, is trading at 8.5 times price-to-earnings, which is well below its historical average of 14 times. However, we expect the volatility in the financial market to extend into 2012 as the European debt problems remain unsolved and geopolitical risks in the Middle East and Africa intensify. Hence, we recommend that investors add gold to their portfolio to balance out the risk in these turbulent times.
Komsorn Prakobphol is wealth manager at TISCO Asset Management. He can be reached via www.TiscoWealth.com.
