Not many traders remember the Goldenberg scam in Kenya. The company allegedly bled the Kenyan coffers of 10% of its GDP from 1991 to 1993.
Its suspected mastermind was Kamlesh Pattni, a Kenyan of Indian origin. His modest tailor shop specialised in safari suits. He is more famous for his trading activities than his skill with scissors.
Pattni was a man in his early twenties with immense confidence. His connections belied his youth and standing. Through a chance meeting with the head of Kenya intelligence, he was able to secure connections with then-President Daniel Arap Moi’s regime.
Pattni found a golden loophole in the Kenyan export system. Gold exporters received a subsidy as an incentive for generating foreign exchange. Goldenberg received a 60% subsidy from the government for exporting gold. For instance, for a US$1000 tonne gold container, the company would get a US$600. Goldenberg received US$2.3 billion in subsidies.
Goldenberg was supposedly in the business of exporting gold. Kenya had as much gold as Ang Mo Kio has snow.
It eventually came to light that Goldenberg had no gold. The gold containers were full of dust. Pattni was charged with several counts of fraud. The court case dragged on for a decade. He was acquitted of all charges.
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The grim memory of this allegation has cast a cloud on today’s gold boom. Since the middle of February, gold prices have risen 20%. At US$2,350 ($3,180) an ounce, gold is at an all-time high.
The sudden surge seems to be hard to explain. The precious metal is a safe haven. Its prices move higher when interest rates fall. Gold does not generate interest. When interest rates fall, the opportunity cost of holding gold diminishes.
The other factor that drives gold prices is uncertainty. Two savage conflicts (Ukraine and Gaza) are dominating the headlines.
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The mystery is that the expected Fed rate cuts have been priced in for over six months. If anything, the timing of rate cuts has become murkier in recent weeks. Also, the war in Ukraine has been raging for over two years. Gaza came under fire on Oct 7 last year.
Why are gold prices suddenly rising now? Gold breaks a new record every day. The plot thickens when one examines ETF volumes. ETFs make it easier for ordinary investors and institutions to trade the metal. They remove the compulsion of finding physical gold and trading it.
Gold ETF volumes have been 15% lower in the last two months than in the two months preceding it. The gold boom is taking place while ETF volumes slump.
This leads us to the conclusion that the buyers of gold may not be institutional investors or retail punters. Central banks are buying physical gold. Physical gold is traded through the over-the counter (OTC) market. The volumes in the OTC market have soared.
The central banks are not traders of gold. They are long-term holders. Buying gold can reduce one’s exposure to the US dollar. It can also offset political risk. China’s central bank PBOC is at the forefront of the buyers.
The PBOC added 160,000 troy ounces of gold to its reserves in March. (One troy ounce is around 31g.) This amounts to US$381 billion. China’s gold holdings are less than 10% of foreign reserves. This ratio could rise, as the PBOC looks to spread its risk.
The best gold trade may be in the stock market.
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The last gold boom was after the Global Financial Crisis. Gold prices almost doubled from December 2008 to May 2011. Some jewellery stocks outperformed the precious metal.
Singapore and Hong Kong are the centres of the gold trade.
The listed jewellery stocks seem cheap. Out of the 19 stocks, only four are below book value. Eight are trading below the inventory on the balance sheet. The gold on the shelves is worth more than the stock prices. The stocks have dropped by an average of 35% since March 2020.
Taka Jewellery Holdings is a Singapore-based jewellery shop. It is trading at 0.4 times P/B. Its inventory of $60 million is double its market capitalisation.
Hong Kong-based Chong Fai Jewellery Group runs a retail shop in Kowloon. It is trading at 0.7 times its inventory and 0.6 times its book value.
Investors should not ignore gold in the stock market. It may not turn to dust like in the Goldenberg scam.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era
