Bespoke Investing feature #10
Updated on 5/2/17
Since the U.S. Fed raised rates on 14 December 2016 world gold price roughly hit a low of USD1128/oz on 16/12/16 and only broke out of the mid-$1150s on 5/1/17. We had added back to our gold holding one gram@MYR165.60 on 15/12/16 when world gold price was $1137 per ounce. [The local gold transaction represented a 2.7% difference from the last 1 gram sold on 22/11/16 at MYR170.20/gm (cimb buy quote) – synthesized via MYR170.20/MYR165.60 =1.027]
The difference in world gold price per ounce was USD1218/USD1137=7.1%. The replacement cost (cimb sell quote) of MYR165.50 on 15/12/16 against the 22/11/16 cimb sell quote of MYR175.72 was 5.8% lower – hence you could say that the “trading cost” due to bank’s selling and buying quotes spread was the real winner of the gold transaction if you reflect on the resultant 2.7% measly gain.
On 6/1/17 precious gold briefly surpassed USD1180 while local gold price was about MYR172.40 (cimb sell quote) which was MYR6.80 higher than our last gold purchase cost. We could have increased our gold holding because local gold selling and buying quotes spread was about MYR5.00. Alas world gold price settled just below USD1173/oz the same day.
This year could repeat 2016’s gold price retracement declines after the month of March. Keep in mind Chinese New Year gold demand for 2017 will peter out at the end of January. Nonetheless a low real yield market environment would continue to brighten gold price long term prospects and low rates would persist through 2017. For sure dip-buying will support any precious gold downside once the USD1300/oz is reached.
The week through to 31 December 2016 saw U.S. jobless claims near to four-decade lows. But shortage of skilled labor would put a dent to productivity. In addition private sector hiring slowed in December. The health of stocks though is influenced more by business confidence and weighing of revenue distribution in favor of equities holders. Prospective looser U.S. regulations and tax breaks of Trump’s administration could be regarded as plus points but protectionist policies could cut away the potential benefits. The corollary is that bespoke gold investing ought to be based on down to earth prudence more that getting swayed by any stocks price surge detrimental to gold investment.
The Dow once again closed above 20,000 points on 3 Feb 2017 but that did not necessarily reflect the middle class economic outlook and only 30 companies make up the Dow. Still, we cannot completely ignore the Dow.
In the perspective of bespoke gold investing what appears to be certain is exposure to stocks is a crowded trade. Raising cash and holding more precious gold when opportune is more prudent. Market momentum could be fading because more stocks were down than up as the S&P 500 Index and Nasdag recently reached new highs.
Incidentally on 22/11/16 world gold price was about $1218/oz and the prevailing MYR/USD=4.496 rate was comparatively weaker than the MYR/USD=4.492 rate on 15/12/16. A weaker exchange rate makes the local gold price higher so it’s quite favorable to sell when the Malaysian currency is on the weaker side (the case on 22/11/16). The replacement cost of local gold on 22/11/16 was MYR175.40 (USD1218/ounce) compared with MYR165.60 (USD1137/ounce) on 15/12/16 thus generally reinforcing the notion that it’s more favorable to buy when the local currency is comparatively stronger.
The current 6/1/17 world gold price at USD1173/oz was lower by 3.8% than USD1218 (on 22/11/16) and local price of MYR172.40/gm is 1.9% lower than MYR175.72/gm (on 22/11/16). The 6/1/17 MYR/USD=4.533 rate reflects a prevailing weak Malaysian currency thus we could leverage on any local gold price distortions with any surge in world gold price when the Malaysian currency improves.
The upside prospects of $1218/ounce at the 6/1/17 exchange rate could mean MYR177.89/gram (nearly 7.4% higher than MYR165.60 replacement cost on 15/12/16) and surely world gold price of $1300 is within reach. Let’s analyze in EP (MYR Equivalent Price per gram) values.
. USD/oz MYR/USD MYR/gm EP
22/11/16 $1218 4.496 MYR175.72_Base MYR176.65_Base
15/12/16 $1137 4.492 MYR165.60_-5.8% MYR164.30_7% lower
6/1/17 $1173 4.533 MYR172.40_-1.9% MYR170.92_3.2% lower
12/1/17 $1206 4.525 MYR174.00_-1.0% MYR175.46_0.7% lower
18/1/17 $1215 4.504 MYR176.40_+0.4% MYR176.03_0.35% lower
The 6/1/17 rather weak MYR/USD consequential effect was that even though current world gold price was lower by 3.7% relative to 22/11/16, in terms of local gold price it was only 1.9% lower. In terms of EP it was 3.2% lower and more reflective. On 12/1/17 world gold price touched USD1206 at one stage before the Malaysian trading day ended – representing merely a lower 1%. Local gold price at MYR174 was also 1% lower since the Malaysian currency had improved to MYR/USD=4.525.
We have to be very prudent in adding to our gold holdings because the Malaysian currency exchange rate is influenced by crude price and real politics developments. The EP value above the 22/11/16 base of MYR176.65 will be a more reliable reference upward bias threshold indicator. On 18/1/17 the EP value as well as the world gold price was still lower than base although the local gold price was slightly higher. Notch that to the improving Malaysia currency exchange rate against the greenback.
Some economists stress that a major black swan risk for commodity demand is an unexpected economic downturn in China, a major commodity consuming nation. Especially affecting crude oil prices is the market perception of EVs’ medium-term effect on oil demand in event of breakthrough battery technology pushing prices drastically lower than the current price levels.
Commodity prices black swans will underscore high levels of price volatility in 2017 because markets react to price in future developments. Since continued high rates of drilling technology improvement could increase well productivity and reduce drilling, completion, and production costs the increased supply from the shale oil sector would lower crude price – a negative factor for the Malaysian currency.
On the other hand escalating tensions with Iran and a Venezuelan default could give oil prices a lift. There is a need to balance the risks of unforeseen macroeconomic shocks and their effect on demand (bearish price) with potential geopolitical shocks disrupting the supply side of the market (bullish price). In addition a tightening crude oil inventory picture will exacerbate how the market prices supply risks even if no physical supply disruption occurs.
Price volatility of other commodities such as palm oil and natural rubber too will bear on the Malaysian currency and price of local gold. All in all we look forward to gold price next legs up starting with world gold price again having to breakout of the USD1200 per ounce area. Tracking the two weeks through to 3 Feb 2017 it hovered below USD1230/oz.