Is Gold Attractive After the Selloff?

Gold experienced the biggest decline in history, dropping US$210/oz or 13.7% over two days. Is gold an attractive investment at the current price level?

To answer the question we need to first understand why gold price dropped in the first place. The news about central banks dumping gold triggered the market to rethink gold as an investment vehicle. This is a reversal of the trend in the past few years, when central banks purchased more and more gold as reserve.

The spectacular rise in gold price in the past few years was mainly due to the belief that it is better to hold onto real assets like gold amid the current expansive monetary environment. Many investors, such as John Paulson, do not believe that printing money by central banks is going to solve all the problems  - hence they decided to bet on gold instead. The sudden drop in gold value reminded investors that investing in gold can be risky too. With price dropping 13% in two days, gold is no longer considered a safe haven.

Finally, gold is only worth what the market thinks its worth. Gold is different from other commodities in that the majority of people purchase gold as a storage of value. There is a limited industrial application of gold compared to other commodities such as silver or bronze. Gold doesn't produce any earnings or cash flow; in fact, it would cost you money to store it if you hold physical gold so it has a negative yield. Without limited real application any produces no cash flow, gold is a type of assets that is difficult to value. Some can argue that the floor price of gold is the cost of production, but if the higher cost gold producers don't find it worthwhile to produce gold, they can simply shut the mine down.

With the market now realizes that there is a lot of volatility in gold price, I don't see it going back up to the $1,700 range. Therefore, even though current gold price dropped a lot, I still don't think it is an attractive investment.

ASEAN Equity Fund Purchased

I purchased a mutual fund focusing on equities in the ASEAN region just before CNY. The followings are the reasons for the purchase:

• Despite the rapid appreciation of equity value, the valuation for ASEAN equities is still around average compared to historical average.
• The global economy is starting to recover as evidenced by recent economic indicators in the US and Asia. Tail risks have also fallen, therefore the downside risks for equities have reduced significantly.
• ASEAN economies are well positioned to benefit from the recovery in global economy as more companies shift their production factories from China to countries like Indonesia and Vietnam due to lower production cost (even after factoring in the difference in productivity, workers in Southeast Asia are still much cheaper than China now, and the productivity gap is only going to narrow over time).
• As more foreign investments are made into these countries, currencies for ASEAN countries may appreciate against the USD. The foreign exchange rates for ASEAN countries against USD are still below the pre-Asian Financial Crisis level in 1997.

I should have made this purchase a while ago but due to certain compliance requirements I can finally make the investment now after some delay. Since equity prices have increased so much in the past three months, I don't expect the investment to have a very high return but the risk/reward still looks attractive.