Analyzing "Gold Prices" in the Global Market as the SET Index Remains Directionless and Risks a Correction, with Two Main Factors Influencing Future Gold Price Movements to Help Clarify Whether It's Still Timely to Invest in This Asset?

The SET Index is still directionless and at risk of a correction, with the potential for this sideways movement to continue for some time due to i) the profit estimates for 2020 being revised downwards, worse than previously expected. The performance of large-cap stocks, such as commercial banks and energy companies, has been weak. Although many mid- and small-cap stocks have shown strong performance, it is insufficient to support the overall performance of the Thai stock market.

ii) The increasing investment risk in the Thai stock market due to political risk in Thailand. Meanwhile, gold prices, as another safe-haven asset, have been continuously rising, reaching a new all-time high in early August 2020. While I still believe that the correction in the Thai stock market presents a buying opportunity for fundamentally strong stocks for long-term investment, diversifying risk into other assets like gold is also important. In this article, I would like to present statistical data on some factors that influence gold prices, which can be used for concrete investment decisions.

An article about gold prices recently published on www.ssrn.com, which ranked among the top five downloads last week, is titled "Gold, the Golden Constant, COVID-19, 'Massive Passives' and Déjà vu" written by Erb Claude, Harvey Campbell, and Viskanta Tadas. It provides interesting insights into the analysis of gold prices in the global market with various factors, and I have tested historical data to validate statistical hypotheses, finding significant results.

The first point is that gold is a hedge asset and will rise (or fall) when inflation (or deflation) is anticipated in the future, as seen during the global economic crisis in 1980, known as '1980 Stagflation.' The inflation-adjusted gold price (or Real gold price) peaked in January 1980 at $8.74 per ounce (the global gold price at that time was $682 per ounce).

In contrast, the new peak gold price, when adjusted for inflation, would yield a real gold price of $7.97 per ounce (calculated from a gold price of $2,062 per ounce and a U.S. inflation index of 259 points). Most scholars attribute this situation in 1980 to gold's role as a hedge against inflation. The recent rise in gold prices may also be due to expectations of inflation following the massive monetary stimulus by nearly every country worldwide.

The second point is that if gold is considered a credit risk-free asset that can maintain its value over the long term (preserving purchasing power), it is akin to government bonds. Therefore, changes in interest rates will similarly affect the Real gold price as they do with government bonds.

The final point is that the amount of gold held by ETFs directly impacts the Real gold price. This is based on the principle of supply and demand; an increase (or decrease) in gold holdings by ETFs will positively (or negatively) affect the Real gold price. I believe this factor is difficult to predict, as we only know when ETFs buy or sell gold after the transactions have already impacted the price.

Therefore, if we anticipate that the U.S. Federal Reserve and other countries will maintain low policy interest rates or further reduce them from the current 0.25%, while countries worldwide continue to inject liquidity through monetary and fiscal policies to support and stimulate the economy, this could lead to inflation. With these two factors, I believe they are sufficient to allow gold prices in the global market to rise and reach new highs after the correction.

Returning to the overall investment picture in the Thai stock market following the 2Q20 earnings report, as mentioned at the beginning of the article, I assess that the Thai stock market will continue to move sideways, and investors should focus on individual stocks with growth potential in the second half of 2020 while being cautious of value traps, where even if stock prices are low, weak performance trends may prevent price increases until the worst period has passed. Additionally, I recommend monitoring government economic stimulus measures expected to be gradually released starting from late August onwards.

SOURCE: www.bangkokbiznews.com