Gold: To invest, or not to invest?

Gold: To invest, or not to invest?
An employee shows gold bullions at Degussa shop in Singapore June 16, 2017. (Reuters)
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Updated 24 December 2020

Gold: To invest, or not to invest?

Gold: To invest, or not to invest?
  • Ultimate safe-haven asset had record highs this year 

RIYADH: The coronavirus pandemic has had a brutal impact on the world’s economy, but it hasn’t all been bad news. 

Gold bullion, the world’s go-to commodity in times of crisis, was up around 24 percent this year and is set for its biggest annual gain since 2010.

What is this precious metal’s big attraction? It benefits from diverse sources of demand - as an investment, reserve asset, a luxury commodity and a technology component - according to the World Gold Council. It is highly liquid, nobody’s liability and carries no credit risk. Furthermore it is scarce, historically proving to preserve its value over time.

Gold can enhance any investment portfolio in four key ways. It generates long-term returns, acts as a diversifier and mitigates losses in times of market stress, provides liquidity with no credit risk and, finally, improves overall portfolio performance.

The price of gold hit a record high in August, when it reached $2,075 an ounce. On Thursday, spot gold was up 0.3 percent to $1,877.43 per ounce, while US gold futures were up 0.3 percent to $1,882.90.

“A combination of a weaker dollar, negative real rates and low yields along with uncertainties around the new strain of coronavirus is helping gold at the moment,” UBS analyst Giovanni Staunovo told Reuters.

The question that analysts are asking is if gold, which is the ultimate safe-haven play, can provide investors with a return in 2021.

Mazen Al-Sudairi, head of research at Riyadh-based financial services company Al Rajhi Capital, said that global consumption of gold had “plateaued” at 4,500 tons for the last decade, which accounted for the upward movement of the price of gold since March.

“Gold prices have dropped from August’s record high … as economies are starting to recover,” he told Arab News.

He also said the risks of excess currency printed by central banks across the world could improve the investment case for gold, once the current declining trend in gold prices came to a halt and changed direction.

“Rising inflation and a low interest rate environment would also support gold prices.” 

A report from Barclays Private Bank said that while gold was unlikely to drive long-term growth, it remained a “powerful diversification tool” and was a good way “to preserve wealth during periods of turbulence.”

Vijay Valecha, chief investment officer at Dubai-based Century Financial, said that while gold prices had surged sharply in 2020, at the moment they were still more than 10 percent off the record high seen in August.

“Demand for the safe-haven metal dwindled on hopes of economic recovery following a string of positive vaccine developments. Nonetheless, the long-run fundamentals still favor the bullion as leading central banks continue to offer support for economies.”

He also said that the market’s focus on a return of inflation in 2021 had helped “put a floor” under gold prices, and that the US 10-year inflation break-evens were above their pre-pandemic levels.

“With the Fed signaling near zero interest rates till 2023, inflation should rise at a faster pace than US bond yields, which means the US real-yields are likely to remain well below 0.0 percent. This subdued real rate environment will buoy the attractiveness of gold as an alternative investment to fixed income.” 

He added that vaccine-related optimism, Joe Biden’s election victory, a coronavirus relief package from the US and the Fed’s commitment to maintain its unprecedented accommodative monetary policy stance had all generated expectations for reflation trade in 2021. This pointed to further downside momentum for the dollar, indirectly favoring gold.

Given the extended era of ultra-low interest rates, ongoing weakness in the dollar, swelling-debt-to-GDP ratios, rekindling of inflation pressures and uncertain timeframes for the mass rollout of approved vaccines, Valecha said that dips in the price of gold could be considered buying opportunities.

“However, investors should not expect a repeat rally of this year as the vaccine-led recovery optimism will cap the gains.”

Bitcoin has been the buzzword in the business community over the last few years, and some have speculated it could be touted as the next gold. Cornelia Meyer, a Ph.D.-level economist with 30 years of experience in investment banking and industry, i snot convinced: "For the time being Bitcoin is still too speculative to be a reliable store of value, which gold is. However, this year has seen the first albeit tentative inflow of institutional money into the crypto currency."

Meyer believed that while the rally in gold earlier in the year was fuelled by the pandemic, but there are also otehr factors at play. "It was further aided by the fact that traditional safe assets like OECD government bonds have extremely low or negative yields."


China’s central bank rules all crypto transactions are illegal

China’s central bank rules all crypto transactions are illegal
Updated 24 September 2021

China’s central bank rules all crypto transactions are illegal

China’s central bank rules all crypto transactions are illegal
  • The global values of cryptocurrencies including Bitcoin have massively fluctuated over the past year partly due to Chinese regulations
  • Bitcoin, the world’s largest digital currency, and other cryptos cannot be traced by a country’s central bank, making them difficult to regulate

BEIJING: China’s central bank on Friday said all financial transactions involving cryptocurrencies are illegal, sounding the death knell for the digital trade in China after a crackdown on the volatile currencies.
The global values of cryptocurrencies including Bitcoin have massively fluctuated over the past year partly due to Chinese regulations, which have sought to prevent speculation and money laundering.
“Virtual currency-related business activities are illegal financial activities,” the People’s Bank of China (PBOC) said in an online statement Friday, adding that offenders would be “investigated for criminal liability in accordance with the law.”
The notice bans all related financial activities involving cryptocurrencies, such as trading crypto, selling tokens, transactions involving virtual currency derivatives and “illegal fundraising.”
Bitcoin, which had already been falling before the announcement, sank by as much as 8.9 percent to $41,019 in European afternoon trading before recovering slightly later in the day.
The central bank said that in recent years trading of Bitcoin and other virtual currencies had become “widespread, disrupting economic and financial order, giving rise to money laundering, illegal fund-raising, fraud, pyramid schemes and other illegal and criminal activities.”
This was “seriously endangering the safety of people’s assets,” the PBOC said.
While crypto creation and trading have been illegal in China since 2019, further crackdowns this year by Beijing warned banks to halt related transactions and closed much of the country’s vast network of bitcoin miners.
Friday’s statement by the central bank sent the strongest yet signal that China is closed to crypto.
Bitcoin, the world’s largest digital currency, and other cryptos cannot be traced by a country’s central bank, making them difficult to regulate.
Analysts say China fears the proliferation of illicit investments and fundraising from cryptocurrency in the world’s second-biggest economy, which also has strict rules around the outflow of capital.
The crypto crackdown also opens the gates for China to introduce its own digital currency, already in the pipeline, allowing the central government to monitor transactions.
In June, Chinese officials said more than 1,000 people had been arrested for using the profits from crime to buy cryptocurrencies.
Several key Chinese provinces have banned the operation of cryptocurrency mines since the start of this year, with one region accounting for eight percent of the computing power needed to run the global blockchain — a set of online ledgers to record bitcoin transactions.
Bitcoin values tumbled in May on the back of a warning by Beijing to investors against speculative trading in cryptocurrencies.
“China’s ban on all cryptocurrency trading activity will have some short-term impact on currency valuation, but long-term implications are likely to be muted,” said Ganesh Viswanath Natraj, Assistant Professor of Finance at Warwick Business School.
“This ban will result in the migration of crypto investment opportunities to other hubs in Asia, such as Singapore’s launch of the DBS digital currency exchange earlier this month,” he added.


Saudi Arabia insurance reforms will enhance sector — CAIS CEO

Saudi Arabia insurance reforms will enhance sector — CAIS CEO
Updated 24 September 2021

Saudi Arabia insurance reforms will enhance sector — CAIS CEO

Saudi Arabia insurance reforms will enhance sector — CAIS CEO
  • Adoption of IFRS 17 standards will increase investment in the sector

RIYADH: Saudi Arabia may be the first country in the world to witness a merger between three insurance companies following regulatory reforms, according to Sulaiman Binmayouf, CEO at United Co. for Actuarial Services CAIS.

Many of Saudi Arabia’s 29 insurance companies need capital infusions or mergers to meet the requirements of regulators, after they ordered to triple capital to SR300 million from SR100 million, Binmayouf said.

The Kingdom’s insurance companies are only profitable with high premiums, some of which they have to freeze as reserves, meaning they can’t invest the money, he said.

However, he expects the adoption of IFRS 17 standards by the insurance sector in the Kingdom will help solve the problem.

IFRS 17 is an International Financial Reporting Standard that was issued by the International Accounting Standards Board in May 2017.

The financial statements of insurance companies on the Capital Market Authority (CMA) website are not sufficient for taking an investment decision, said Binmayouf.

The standard will provide a more accurate supervision and disclosure process in the development of financial statements, giving investors a clearer idea of whether they want to invest in the company or not, he said.

“Investors should look at the status of insurance companies in terms of the board of directors and committees, and review the strategic plan and financial statements to make the investment decision,” he said.

That will lead to more capital flowing into the insurance sector, while supporting its stability, he said. IFRS 17 will be implemented in stages, as decided by the central bank.


Fed policy tightening not all bad for Gulf economies — Jefferies

Fed policy tightening not all bad for Gulf economies — Jefferies
Updated 24 September 2021

Fed policy tightening not all bad for Gulf economies — Jefferies

Fed policy tightening not all bad for Gulf economies — Jefferies
  • A likely strengthening of the dollar, to which Gulf currencies are pegged, may push down inflation, because it makes imports less expensive

RIYADH: The impending end of super-loose monetary policy from the Federal Reserve will have both positive and negative effects on the economies of the Arabian Gulf, according to Alia Moubayed, a managing director at investment bank Jefferies International.

A likely strengthening of the dollar, to which Gulf currencies are pegged, may push down inflation, because it makes imports less expensive, Moubayed said in an interview with Asharq.

Higher interest rates on dollar-denominated assets tend to lead to outflows from emerging markets, but Moubayed said that the Gulf markets have recently witnessed an influx of foreign capital, especially into stocks, and so should not be affected as badly as many of their EM peers.

Higher interest rates will increase the financing burden on governments with large budget and trade deficits, such as Bahrain, Moubayed said.

However, countries such as Qatar, Saudi Arabia and the UAE will “benefit from shrinking deficits due to the rise in oil prices and the increase in revenues in national currencies,” she said.

The Federal Reserve announced yesterday that it will likely start reducing its asset purchase program soon, and said policy makers are increasingly minded to start raising interest rates in 2022 instead of 2023 as previously envisioned.

If progress toward employment and inflation targets continues, the slowdown in asset purchases may start in November and end in mid-2022, the Fed said.


APICORP sukuk program given expected AA rating by Fitch

APICORP sukuk program given expected AA rating by Fitch
Updated 24 September 2021

APICORP sukuk program given expected AA rating by Fitch

APICORP sukuk program given expected AA rating by Fitch
  • A default in APICORP's sukuk program would be considered a default in the parent, Fitch said

RIYADH: APICORP, the multilateral development bank set up by Arab oil producers, has received a rating of AA(EXP) by Fitch for its sukuk program.

APICORP Sukuk Ltd. (ASL) is incorporated in the Cayman Islands with the sole purpose of issuing Islamic debt. The final rating is contingent on Fitch receiving documents that support information already provided.

ASL is expected to receive the same AA rating as APICORP as a default in the sukuk program would be considered a default in the parent, Fitch said. APICORP’s rating is based on Fitch’s solvency and liquidity assessment and a “medium risk” business environment.

APICORP was established in 1975 by the 10 members of the Organization of Arab Petroleum Exporting Countries (OAPEC) with the aim of developing the Arab world’s energy sector through equity investment, debt financing, financial advisory and energy research services.


UAE allocates $17.6bn to Emirati housing program in Dubai

UAE allocates $17.6bn to Emirati housing program in Dubai
Updated 24 September 2021

UAE allocates $17.6bn to Emirati housing program in Dubai

UAE allocates $17.6bn to Emirati housing program in Dubai
  • Land plots allocated to Emirati housing projects in Dubai increased to 1.7 billion square feet.

RIYADH: Dubai Ruler Sheikh Mohammed bin Rashid Al Maktoum has approved the allocation of 65 billion dirhams ($17.6 billion) to a housing program for Emirati citizens in Dubai, to be spent over the next two decades, according to a statement from the Dubai Media Office.

Sheikh Mohammed, who is also prime minister of the UAE, issued directives to quadruple the number of Emiratis benefiting from the housing program from next year, and to increase the land plots allocated to Emirati housing projects in Dubai to 1.7 billion square feet.

“We are working to develop a comprehensive plan for ensuring our citizens have access to high quality housing over the next 20 years,” said Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, deputy ruler of Dubai. “Dubai’s urban development plans are subject to constant review and our housing policy will continue to evolve according to the requirements of our citizens.”

The Dubai 2040 Urban Master Plan sets out a comprehensive future map for sustainable urban development in the city, and focuses on enhancing people’s happiness and quality of life in line with the UAE’s vision for the next 50 years.