Wednesday, January 26, 2011

Emas Dan Perak

Sorry, couldn’t resist the pun (for those not familiar with Bahasa Malaysia, the title reads “Gold and Silver”).

The Perak state government appears to be pushing ahead with plans to issue dirhams and dinars:

Perak to launch gold dinars next month

IPOH: The Perak Government will launch gold dinar and dirham currencies next month in a move to diversify its reserves.

State executive councillor Datuk Mohamad Zahir Khalid said the state government was working with the Kuwait Finance House (KFH) to introduce the currencies as the finance company has vast experience in handling the currencies.

He added the currency to be introduced by Perak would be very different from that introduced by the Kelantan Government before.

Speaking to reporters after meeting KFH top management, Mohamad Zahir said Menteri Besar Datuk Seri Dr Zambry Abdul Kadir would explain the details on the mechanism and the form of the currency at the launching ceremony.

That first sentence is a head scratcher – what “reserves”? If the state government is issuing dinars, presumably for Ringgit, then they’re not diversifying their asset holdings. If in fact they’re buying issued dinars in exchange for Ringgit, that might mean diversification – but it also means they’re speculating in asset prices.

I can’t help but juxtapose this development with what’s going on in the gold market:

Gold Tumbles to Three-Month Low as Investment Demand Slumps

Jan. 25 (Bloomberg) -- Gold futures fell to the lowest in almost three months as demand waned for precious metals as alternative investments.

Global investors are becoming more confident about the economic outlook, according to a quarterly poll of 1,000 Bloomberg subscribers. Almost twice as many of those surveyed said they will cut gold holdings in the next six months, instead of increasing them. More than half said the gold market is a bubble...

...Gold futures for February delivery fell $12.20, or 0.9 percent, to settle at $1,332.30 an ounce at 1:42 p.m. on the Comex in New York. Earlier, the price touched $1,321.90, the lowest since Oct. 27.

This month, gold has dropped 6.3 percent. Last year, the metal climbed 30 percent, outperforming stocks and bonds as central banks kept interest rates at record lows to revive the economy…

…U.S. interest rates are expected to rise, eroding demand for the metal, analysts at Goldman Sachs Group Inc. said today in a report. The price reached a record $1,432.50 on Dec. 7 and gained for the 10th straight year in 2010.

The European Central Bank may raise its benchmark rate from 1 percent this year as the region’s fiscal crisis ebbs, said Adam Klopfenstein, a senior strategist at Lind-Waldock in Chicago.

The only “winner” I see here is KFH.


  1. Recent falling gold price has largely due to CFTC's proposal on position limits.

    Secondly, gold and other commodities are in correction period after a long bull run.

    I found most blogs you've written are largely once sided. Why not look to the second half of the story?

    Sorry for my candor.

    Lastly, yes my last comment here, I promise.

    You're the only one I found in the country who tirelessly write something about economic. Our views are different, but for this, my solute to you. Good luck.

  2. Thanks for the candour and comments - no need to apologise, that's one of the reasons I write this blog in the first place.

    Here's my position on gold - I have no problem with gold as an investment, but I have a huge problem with gold as an alternative currency. I wouldn't bother commenting on gold or any other asset market otherwise.

    But in this context, I also see the potential of a bubble end-game scenario being played out, with uncles and aunties and pakciks and makciks getting into gold, just as the professionals are starting to leave. These are the people I'm concerned about; regular investors know how to take care of themselves.

    Missing an investment opportunity is one thing; but buying into an asset, especially one that generates no income returns, right when the market is peaking is quite another.

    Most of the factors that have supported gold's rise over the past two years are starting to turn - US growth is returning (and with it returns on more traditional investment assets), and China and India are clamping down on inflation.

    Last thought: since 2001, the gold price has outrun the increases in virtually every other commodity. That divergence is troubling.

  3. I echo Anonymous 12:12's praise of your blog and hope you keep it going. Meanwhile, gold prices could be relatively flat for this year as it corrects and consolidates after the 10 year increase in prices.

    With respect to the gold bull run, the indications of a bubble you cite i.e. uncles and aunties and pakciks and makciks getting into gold are far from evident locally and there is not anecdotal evidence of this globally either.

    With regard to your concerns regarding the use of precious metals as currency, I have to say you make some good points. However, the fiat currency system has its own problems.

    As far as I am aware, the current situation where the entire world relies on fiat currency systems is unprecedented and by no means can past performance be indicative of future performance. It will be interesting to see how this all plays out.

    On the divergence between gold price and other commodities, I agree that it is troubling but I see it as being more in favour of continued support for gold and higher prices over the long term.

  4. Thanks and welcome.

    I first started getting concerned over gold when commercial banks here started offering gold linked accounts. Companies selling bar and coin investment have proliferated in the last couple of years. You can get gold bars and coins via vending machines in the Middle East. Now we have local state governments who think it's a good idea to sell gold currency to their citizens. Not exactly mom-and-pop stuff, but enough to get me worried.

    There are solid foundations for the runup in gold:
    1. Low interest rates, which reduces the opportunity costs of holding gold;
    2. Easier retail access via ETFs and gold-linked accounts;
    3. Falling production;
    4. Inflation in China and India, which are the biggest gold markets.

    ...but as global growth gets stronger, interest rates will start rising. Both China and India have raised interest rates to stave off inflation in recent months - if it works, that undercuts one of the main fundamental factors for investment demand (jewelry demand is stagnant).

    I think China demand is key - the only commodities that have kept pace with gold are all items with import demand from China, such as coal, copper, iron, lead, nickel, crude oil, palm oil, rubber, tin and zinc. Food items by comparison have fallen far, far behind, as much as 100% (rice) to 400% (lamb) less in gold terms compared to 2000. But these items all have industrial or consumption uses - gold doesn't.

    Regarding fiat currency, I'm well aware of the weaknesses, not least the reliance on debt for money creation. But to me these have always paled in comparison to the disadvantages of a metallic or commodity based currency system.