• 월요일, 04월 19일
월요일, 04월 19일

Opinion: Gold could be a good hedge against falling markets

Opinion: Gold could be a good hedge against falling markets

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[Newsphopick=Kingsley Lim] Since the dawn of time, man has always had an obsession with gold. For some reason, the precious metal signifies wealth, power, prestige and has always been considered by many to be a great store of value.

Fast forward to the present day, gold is still a favoured investment by many. Hedge fund managers and retails investors have always clamoured for gold, especially when the stock markets go into a recession. In the last recession itself, gold prices rose from US$900 an ounce to more than US$2000 an ounce. Then, the fear in the markets were at an all-time high. Stock prices dwindled precipitously. On the contrary, gold was considered a safe haven asset while stock markets fell in tandem during the Great Financial Crisis. 

For more than a two decades, gold has had a considerably good run. In 2001, gold’s price was just US$400 an ounce. This and more shows that gold may be a good hedge against falling markets. The argument makes even more sense when you consider that the currency to gold ratio in the financial system has been increasing over time. Money printing and rising debt levels with a small quantity of gold resources would inadvertently drive gold prices up. 

Today, gold prices stand at around US$1800 an ounce and the looming question is whether gold makes a good hedge at today’s prices. The problem with gold, according to Warren Buffett is that, it does not yield anything. When you invest in real estate and earn rental income, you could value the income stream of the property quite easily. When you invest in stocks that pay dividends, you could value the dividend stream easily. When you own a farm that grows oranges, you could value the proceeds readily. What about gold? Gold has no yield. It is impossible to value the precious metal. As such, one can only speculate what its eventual price may be. One thing is for sure – man’s obsession with gold will not wane over the next decade. 

For some, gold’s outlook for the coming years look more promising than ever. Hedge fund manager, Diego Parrilla, is a believer in ‘anti-bubble’ assets. He believes that some assets will outperform in times of a crisis. Bubbles and recessions only act to drive the prices of these assets up. And which asset is he talking about? You guessed it. It’s gold. 

For years now, the hedge fund manager, who manages US$450 million, deploys capital into undervalued assets which will outperform the markets, when bubbles burst. Diego said “What we’ve seen over the last decade is the transformation from risk-free interest to interest-free risk, and what this has created is a global series of parallel synchronous bubbles.” 

He added that “What you’re going to see in the next decade is this desperate effort, which is already very obvious, where banks and government just print money and borrow, and bail everyone out, whatever it takes, just to prevent the entire system from collapsing,” suggesting that the over printing of money would be one of the factors that drive the price of gold up. >Diego has a price target for gold that may get you excited. In Diego’s view, he believes that the price of gold would eventually rise to US$5000 an ounce. This could be a factor of close to three times from today’s price of US$1800 an ounce. 

While I am not sure how much gold prices are going to fluctuate, I generally hold the view that gold prices are a good hedge in times of a recession and a bubble. However, there is a strong argument that the markets are ripe for a correction amid the coronavirus pandemic. With stock markets at an all-time high, the U.S. markets are trading at a 10-year adjusted price-to-earnings-ratio of around 30 times. The stock markets have not reflected the economic reality we are in. Just today, one of the largest employers in Singapore, Resorts World Sentosa announced that it will be furloughing its staff due to the coronavirus pandemic. 

That will not be the first and it definitely would not be the last. In the U.S. and around the world, a wave of retrenchments are occurring as we speak. With that, a natural consequence of that is a fall in global consumption. With a wave of bankruptcies not seen since the Great Financial Crisis, it seems probable that a stock market correction could occur in the future. When will that happen? That is anyone’s guess. But if one is a believer that the stock market will eventually reflect actual economic reality, then Diego’s view on gold prices may actually come to pass. If the stock markets fall by 50 per cent from this point, several prominent investors believe that the fear in the markets could very well drive gold past $5000 an ounce. That is perhaps something to think about. For now, I refrain from making predictions of any sort and am contend to sit and watch the markets play out.

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