Firming gold prices present investors with positive returns

The international price of gold increased by 8,6% to end the first quarter 2012  at US$1 662,50 per troy ounce, mainly attributable to global economic trends which include the strengthening of broad-based United States of America (US) economic data, China’s economic slowdown, concerns and the Eurozone crisis.

The World Gold Council (WGC) in its quarterly bulletin said that the eventful quarter for the global economy saw increased volatility in capital markets and this propelled the price of gold.

“In an eventful quarter for the global economy that saw increased volatility in capital markets, gold finished the quarter materially higher despite a number of headwinds,” he said.

The average price for gold was 22% higher on a year-over-year basis, as drivers of gold demand and supply continued to support its long-term trend.

Globally, the first quarter was characterised by generally strong performance across multiple asset classes such as equities and commodities.

“During the first quarter, global developed market equities, excluding the US returned 11.4%; The S&P 500 climbed 12.1%, US real estate rose by 9.8% (DJ US REIT Index) and commodities (S&P GSCI Index) rose 5% with strength in gasoline, oil, silver and soybeans,” highlighted the WGC.

For local investors in Zimbabwe, gold outperformed alternative asset classes like equities, the money market and property. With the advent of gold-linked unit trust funds offered by some financial institutions, investors can now directly tap into the gold boom since the capital and money markets are currently not lucrative investment options.

Tetrad Asset Management’s Gold Fund realised a first quarter return of 6,1% in line with the firming international prices. ZB Asset Management’s Growing Gold Fund recorded a 7,14% growth in the quarter.

On the capital markets, the stock market remained depressed in the quarter on the back of a myriad of problems which include low sentiment caused by the government’s accelerated indigenisation drive which is a fret to foreign investors.

Local punters in the equities market are greatly constrained by the prevailing tight liquidity conditions which have resulted in weak stock prices and low trading volumes. Market turnover totalled US$798,9 million in the first quarter, driven by local buyers, mainly institutional investors. Foreign investors activity  totalled US$108 million.

During the quarter, the mining index plummeted 15% and the industrial index shed 6 %.

The properties market has also remained a buyers’ market,  and this has ultimately led to property prices weakening,giving negative returns on investment. The Old Mutual Securities Property Index indicates a 5,79% decline in the first quarter.

Property consultant, Mike Juru, was this week quoted in the media highlighting that the current economic slowdown had resulted in low investment in real estate as evidenced by the lack of any meaningful development.

“The high costs of construction have made it impossible for developers to undertake profitable projects and the non-availability of mortgage finance has resulted in fewer transactions being concluded, especially in the upmarket residential properties and commercial properties. This situation has led to commercial property and upmarket residential properties remaining subdued since 2009,” said Juru.

For risk-averse investors, the money market also attracted low interest rates in the long end of maturities, with banks avoiding going long due to uncertainties which include possible holding of elections. The 91 day Fixed Deposit rate is currently being quoted  between 15%-20% on an annual basis, which translates to a quarterly return of between 3,74%;4,98%.

Despite the significant response to gold-linked unit trust funds by the market, the funds can only absorb small investors with little capital as low as US$100. Financial institutions are yet to develop gold linked products that cater for huge institutional investors who may want to diversify their portfolios.
Huge investors usually cause liquidity shocks and valuation problems for unit trust funds when they buy and sell out of the funds, thus financially engineered products must be developed to give such investors access to investing in gold.

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