Germany's Degussa: A bull in a bearish gold market
After a tough summer that saw erratic price movements across commodities, spot gold hit a four-week low on Monday. But that has not deterred one German gold bullion dealer from expanding into Asia for the first time.
Degussa Goldhandel opened its first Asia Pacific office, in the heart of Singapore's shopping and lifestyle district, Orchard Road, last week. Degussa chief executive Wolfgang Wrzesniok-Rossbach told CNBC that he was upbeat about the precious metal's future.
"If you ask me where from here in the next year, I think $1,500 is more likely than a $1,000 in the next 12 months," he said.
Gold prices reached a high of $1,294.15 per ounce in January, before hitting the year's lowest at $1,093.8 in August. On Tuesday during Asian trade was hovering close to Monday's four-week low of $1,132.25.
Goldman Sachs said in a recent note that short rallies in gold prices did not change the dull outlook for gold over the longer term, especially as the Federal Reserve normalizes U.S. monetary policy. Like the expected Fed rate hikes, Goldman said the decline in gold prices would be gradual, with the metal sliding to $1,100, $1,050 and then $1,000 over the next three, six and 12 months.
Degussa's Wrzesniok-Rossbach, however, puts up a strong argument against this view.
Excess supply of scrap gold and a disinvestment in gold exchange-traded funds (ETFs) in western countries have kept gold prices low in the past, he said, but these "two major factors actually depressing the price in the last two years have fallen away".
Political uncertainty and volatility in capital markets were creating a need for diversification in investment portfolios, and gold was considered a safe haven for investors, said Wrzesniok-Rossbach, adding "there is higher demand [for gold] on the retail side," a segment that makes up a majority of the company's business.
The company sells gold bars and coins to individual retail investors and has a growing jewelry and lifestyle business, said Wrzesniok-Rossbach. Degussa also buys scrap gold - old, worn jewelry, or bars and coins - in Europe; the service is not yet available in Singapore.
Wrzesniok-Rossbach said growing demand for gold in Asia was behind Degussa's expansion plan. The choice of Singapore as the company's first regional outlet was influenced by the promising "gold-oriented" environment in the city-state. A culture of gold-minded consumers, lower taxes on investment gold and financial and political stability contributed to the attraction, he said.
"You want political, financial, economic stability and this is something that Singapore provides here, almost like no other country in the region."
China, the largest consumer of gold in the region, is still on Degussa's radar, said Wrzesniok-Rossbach, even as concerns mount over a slowdown in the world's second largest economy and a decline in gold purchases amid a government crackdown on corruption that has deterred spending on luxuries.
Degussa's view on China chimes with that of Nomura's analysts, who said in a note last week that while gold demand was likely to be negatively affected by slow growth rates in China, the "magnitude might not be as significant as anticipated."
The analysts wrote that the value of China's gold, silver, and jewelry retail sales saw a 2.4 percent year-on-year increase over the first three quarters of the year, against a declining gross domestic product (GDP) growth rate. But, the analysts noted, this increase was more due to a trend in price mark-ups by retailers, which makes gold jewelry more expensive for Chinese consumers. This, they said, would likely contribute to an overall decline in demand for gold jewelry in the country.
Combined with falling gold prices, Nomura's analysts said "Chinese consumers' initial reaction is likely to [be to] avoid gold consumption before shifting towards gold investment as an alternative asset class."
Reports last month showed China's gold imports from Hong Kong were at a ten-month high with 97.242 tons imported in September. The decision to choose Singapore as an Asian headquarter over Hong Kong, which arguably has better access to the Chinese market, was due to the nature of the business, Wrzesniok-Rossbach said.
"Ninety-seven percent of our business is really with retail customers," whereas the Hong Kong market is "driven by wholesale business." But he did not rule out venturing into Hong Kong in the future.
Gold's woes may not be over, as comments from the Fed last week suggested an interest rate lift off may be closer than previously thought. Higher interest rates in the U.S. will undoubtedly impact the appetite for gold, according to analysts.
Tariq Ali, investment strategist at Standard Chartered told CNBC by email, "We expect gold prices in USD to gradually head lower into 2016" as the U.S. begins its interest rate normalization. Demand for gold "is likely to wane further as the Fed hikes rates" because "higher real (adjusted for inflation) yields elsewhere will likely reduce the incentive to hold non-interest paying gold," wrote Ali.
But Wrzesniok-Rossbach disagreed that a Fed lift off, and a stronger greenback, would cause further dips in gold demand.
"Public opinion is often just looking at the dollar price, in all the countries," he said, adding that in markets where gold has proven its role as a safe haven, a change in the precious metal's dollar price will not affect investment appetite, particularly because in many of these markets, such as China and Germany, locals are unable to invest in dollars.
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"For them, an investment in gold is also an investment against the depreciation of [their own] currency," he said.
David Lennox, a resource analyst at Fat Prophets, told CNBC over the phone that a strong dollar would have bigger impact on gold production than consumption. Lennox explained that there was an upside from a strong dollar for producers because they can sell gold in dollar terms and see higher returns when they convert their revenues back to domestic currencies.
Degussa has offices in Germany, Switzerland, Spain, and now Singapore. Wrzesniok-Rossbach said, there are plans to open a branch in one of the biggest bullion markets - London - at the end of November.
Degussa, which started in 2010, had a turnover of approximately 1.3 billion euros ($1.4 billion) last year and this year projects turnover in the range of 1.6 billion euros, with 30 percent to 50 percent growth in individual months, added Wrzesniok-Rossbach. Part of that growth was driven by an active online business in Europe.
"If you're a startup and you start from zero, in those four years, you have great growth numbers every year," he noted.