This article first appeared in Capital, The Edge Malaysia Weekly on April 22, 2024 - April 28, 2024

WITH mounting tensions in the Middle East boosting gold prices and sustaining global demand for exposure to the precious metal, despite a stronger US dollar last week, gold-linked counters on Bursa Malaysia may still trade to new heights, experts say, notwithstanding the rally in their share prices the week before.

“The few listed companies on Bursa that are related to gold are proxies for exposure to the price of gold. The recent surge in their share prices is in anticipation of the sharp increase in the profitability of jewellers and the sole gold mining company on Bursa,” former investment banker Ian Yoong tells The Edge.

Jeweller Poh Kong Holdings Bhd rose 29.3% year to date to RM1.13 on April 12; and Tomei Consolidated Bhd surged 36.3% to RM1.69. During the same period, the share price of gold miner Bahvest Resource Bhd rose 22% to 61 sen.

“Yes, we do enjoy better profits now, as we are selling some stocks that were bought at lower prices, but this won’t last for long, as we practise natural hedging, replenishing only after selling. Therefore, were gold prices to adjust significantly lower, our bottom line will be affected negatively,” says Poh Kong Sdn Bhd executive director Ermin Siow Der Ming.

The price of gold recorded multiple highs in recent months to peak at US$2,431.29 on April 12 in anticipation of Iran’s retaliatory attack against Israel amid the confluence of geopolitical tensions, central banks’ buying of the yellow metal, the weaker US dollar at the time and expectation of interest rate cuts by the US Federal Reserve in the second half of the year.

Although the gold price has since come off the all-time high, experts predict that it may even reach the US$3,000 mark this year.

The latest comments from US Federal Reserve chair Jerome Powell last Tuesday indicated that recent inflation data, with three months of upside surprises, had not given policymakers enough confidence to ease policy soon, and that the central bank may need to keep rates higher for longer than previously thought. Markets have slashed the amount of easing expected this year to fewer than two rate cuts from September — a sea change from the earlier forecast of six cuts from April.

It is worth noting that when the gold price peaked at US$1,990.46 in May 2020, then to US$2,029.08 three months later and US$2,052.36 in May 2023, shares in Poh Kong and Tomei had spiked, as investors projected the companies would profit from the gold mania.

“These gold-linked stocks benefit from their inventory of gold holdings, which have become more valuable with rising gold prices. Their business prospects did not suddenly become better just because gold prices went up. Obviously, if gold prices continue to surge, the value of their inventory would continue to rise accordingly,” observes TA Investment Management Bhd chief investment officer Choo Swee Kee, who is closely monitoring the geopolitical situation and the strength of the US dollar.

“During times of war, both the US dollar and gold would be [valuable]. But if the US dollar is strong, investors tend to prefer it to gold.”

As at last Thursday, one US dollar got you RM4.7855 against RM4.6058 at the start of the year. Although Poh Kong, Tomei and Bahvest came off years-long share price highs last week, most of the analysts and fund managers contacted by The Edge project a continuation in the upward trajectory and believe the stocks can head to new all-time highs after a decent consolidation.

The fund managers caution, however, that investing in gold stocks subjects investors to equity risks such as the Western sanctioning of Russian gold miners in response to Moscow’s actions in Ukraine, which saw the UK, Canada, Japan and the US banning new imports of Russian gold.

“One must be able to analyse which gold stocks are positively correlated to gold price, as some gold miners are affected by cost rather than the price of gold. Goldsmiths and pawnshops, for instance, may benefit from a higher gold price if they bought inventory [cheaper than prevailing prices]. Like any other commodity player, the business is subject to demand/supply and cost,” notes Areca Capital CEO Danny Wong, who is “neutral” on goldsmiths. He is inclined, however, to add gold exchange-traded funds (ETF) as a hedge to US dollar exposure.

To this end, Yoong believes the most secure form of investing in gold would be by way of SPDR Gold Shares, an offshore ETF offering with exposure to gold bullion. “The ETF price is roughly in line with physical gold. SPDR Gold Shares is one of the world’s largest holders of gold.”

The potential delay in the anticipated rate cuts by the Fed had Philip Capital warning last Thursday that investors should stop buying Malaysia’s sole ETF because gold prices, which are now within the “US$2,240 to US$2,400 range after gaining nearly 16% year to date”, were in the overbought category. It downgraded its rating for the Tradeplus Shariah Gold Tracker ETF to a “hold”.

Experts have pointed out that the recent gold run-up has stalled over the past few days, as there has been little news or activi­ty to help guide its movement.

Meanwhile, gold futures last Wednesday stood at US$2,407 per ounce, having surged 14% since early January.

Analysts whom The Edge spoke to have a positive outlook for Poh Kong, Tomei and Bahvest, as their share prices and inventories are expected to rise in tandem with the price of gold.

“Goldman Sachs has forecast that the price of gold will rise to US$2,700 per ounce by end-2024,” Yoong says, cautioning that the three stocks have risen 22%, 55% and 480%, respectively, in the past 12 months.

He points out that Poh Kong is trading at a price-earnings ratio of 5.1 times (trailing 12 months), according to Bloomberg, and Tomei is trading at a PER of 4.7 times.

“Both have an attractive price-to-book [ratio] of 0.55 times,” Yoong says. “We should be cognisant that a high gold price will increase the ex-factory price of gold jewellery, which translates into higher selling prices if profit margins are to be maintained.

“Significantly higher selling prices will most likely impair sales of mass-market gold jewellery. A significantly higher gold price is deemed to have negative ramifications for listed jewellers, as it is highly likely that they have limited ability to pass on the higher gold price in increasing the prices of gold jewellery substantially. The listed jewellers on Bursa have low-to-average brand equity. Hence a word of caution — not all that glitters is gold,” warns Yoong.

As for Bahvest, the sole gold mining company on Bursa, Yoong expects the counter to “greatly benefit from the resurgent gold price” and he believes it merits greater analysis. “Bahvest’s 52-week low was 10 sen. Now trading [around 56 sen], the share price has risen 480%. It is trading about 16 times FY2024F earnings before incorporating the increase in gold price to US$2,300 per ounce.”

Malacca Securities head of research Loui Low Ley Yee concurs on its outlook, given that much of the negative news about Bahvest’s charges against its former CEO Datuk Lo Fui Ming and his son, Lo Teck Yong, as well as the company’s licensing woes for mining activities are behind it.

In fact, Bahvest’s change of management last May appears to have instilled market confidence in the company, quadrupling its share price from a decade-long low of 13 sen to the 56 sen level last Thursday.

Yoong’s pick for outperformance is YX Precious Metals Bhd (YXPM), which is a 70% subsidiary of Tomei Consolidated. YXPM is a wholesaler of gold jewellery and involved in the design and manufacture of gold jewellery.

Listed on Bursa in June 2022 at an initial public offering price of 28 sen, YXPM closed at 28 sen last Wednesday.

“YXPM is trading about 10 times FY2023 earnings and a price-to-book of 1. It had net cash of five sen per share as at December 2023. The company declared a dividend of 0.8 sen for FY2023 — or a yield of nearly 3%,” notes Yoong.

Despite an observed rush of people pawning their jewellery to take advantage of the high gold price, Poh Kong’s Siow says the group has noted a single-digit pickup in the sale of gold wafers this year.

“When gold prices peak, people tend to rush in to buy gold wafers for investment purposes. As gold prices fluctuate and exceed a certain gross margin, we will adjust retail prices accordingly,” says Siow, who is an adviser to the Federation of Goldsmiths and Jewellers Association of Malaysia and its former president from 2014 to 2018. He is also vice-president of the Asean Gems and Jewellery Association.

As to whether goldsmiths will benefit from the run-up in gold prices, Siow says it actually dampens consumer purchases as has been observed during the month of Ramadan, after Poh Kong raked in “good sales during the Chinese New Year period”.

“The third quarter doesn’t look very encouraging although it is likely to be better than the same period last year. This is the first time we have seen such a dip in our sales, which could be due to either the high gold price or slow sales reflecting the real economy as consumers tighten their belts. Or it could be due to the reopening of schools, indicating that consumers are spending on their children’s education instead,” Siow says, adding that the majority of gold and gold jewellery purchases are made by the B40 group.

Other players are reporting a different experience, though. For one, Habib Jewels managing director Datuk Seri Meer Habib has seen a 30% increase in the sale of gold bars during Ramadan this year, compared with previous years.

“The market is well aware of gold bars as an investment, as we are a very mature market. People are confident and do come back for trade-in. Investors who bought gold [bars] at US$1,500 during the pandemic are now selling at US$2,300 — and they are still buying,” says Meer, who forecasts gold prices to peak at the US$2,500 level.

Meanwhile, Putrajaya has deferred the implementation of the high-value goods tax (HVGT), initially scheduled for May 1, giving concerned gold associations time to engage with the Ministry of Finance to articulate their grievances.

“We are concerned mainly about the disruption that the HVGT will cause on our operations. Tax experts have been saying that the goods and services tax could be a better way to bring in revenue from luxury goods for the national coffers. But should the HVGT be approved, industry players will need a grace period to prepare operationally. We’ll need the remaining months of the year to prepare for it,” Poh Kong’s Siow says.
 

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