Brighter days ahead for gold funds

Due to volatile commodity prices, foreign investment funds performed "bad to worse" in the first eight months of this year, but the situation should improve especially for gold funds, as the London gold price is expected to reach US$1,800 an ounce by year-end.

Research houses and banks foresee additional gold demand from central banks around the world, particularly if the US Federal Reserve decides next week to launch a third round of quantitative easing (QE3). Gold rose 70 per cent as the Fed bought $2.3 trillion of debt in the first two rounds from December 2008-June 2011.

"Should the Fed announce QE3, gold could hit $1,800 this year and the target of $1,900 next year looks achievable," Sanupong Suthadtumakul, a mutual fund analyst at Phillip Securities (Thailand), said last week. "Vice versa, without QE3, gold could fall hard, but should not fall below $1,500."

Among gold-oriented foreign investment funds, the average return in the first eight months was only 0.69 per cent. However, they were better off than funds investing in oil, which showed an average loss of 6.05 per cent. The top three gold funds were Tisco Gold Fund with a 7.19-per-cent return, Tisco Gold Retirement Fund with 6.85 per cent and TMB Gold Fund with 6.39 per cent.

Among FIFs investing in oil, the three worst performers were Kasikorn Oil Fund with a negative return of 5.46 per cent, MFC International Oil Fund with -4.80 per cent and Asset Plus Oil Fund with -4.62 per cent.

Gold is a better choice of commodity than oil, which without new factors may not exceed $100 per barrel in the short term. Still, unlike gold, oil prices tend to stage a small drop.

"Whatever, there will be limited upside gain in risk assets in the short run, given uncertainties in the eurozone and global economy," he said.

Investment and diversification demand for gold remains robust. Gold holdings in exchange-traded products or trusts rose to a record for a second straight day. The amount increased 2.85 metric tonnes, or 0.1 per cent, to 2,470.67 tonnes, data tracked by Bloomberg showed.

Research houses, analysts and banks are revising up their estimates for year-end gold prices in the belief that concerns about inflation and demand for gold as a store of value should lead to higher prices.

JP Morgan and Goldman Sachs have revised upward their year-end forecasts to $1,800 and $1,840.

Jeffrey Currie, head of commodities research at Goldman, in an interview on Bloomberg Television, said he believes monetary policy easing and the Fed pursuing QE3 "will be critical to putting upward pressure on gold prices".

Besides demand for inflation hedging, central banks' gold demand - driven by the urge to expand reserves to diversify from the dollar and guard against a potential gain in inflation - is believed to push gold above $1,800 this year.

Central banks from Russia to Mexico are expanding bullion reserves, buying 273 tonnes in the first half, estimated GFMS, a gold-specialising consultant. They will buy 273 tonnes more in the second half.

According to the World Gold Council, central banks' gold holdings as of last month stood at 31,353 tonnes. The euro area, including the European Central Bank, held 10,787.4 tonnes or 62.8 per cent of their foreign reserves.

The Bank of Thailand was ranked 25th in gold reserve holdings at 152.4 tonnes or 4.5 per cent of its foreign reserves worth $179 billion as of August 31. Last year, it held 130 tonnes or 3 per cent of reserves. Prior to the financial crisis in 2008, gold reserves were kept below 100 tonnes.

THE NATION