Monday, August 8, 2011

Gold to reach US$2,100 in 2014

KUALA LUMPUR: The rally on gold price is far from over. Steve Brice, Standard Chartered Bank chief investment strategist, believes that despite gold already trading at a record high level, the price could go higher to US$2,100 (RM6,174) per ounce in three years, more than 20% higher than the current level of US$1,615.

He said gold is favoured over other investment assets as it is expected to generate good returns. And the precious metal is considered a handy tool to diversify an investment portfolio given that gold has a low correlation with equities, he told a media briefing yesterday.

“It is likely equities will have a high volatility, and so if you have a high percentage of equity in your portfolio then obviously you have a high volatility. You can mitigate that with bonds, but you could expect bonds to give relatively low return, or even negative return, depending on which bond market you’re looking at,” he said.

He argued that even in a global economic slowdown, gold is more attractive as policymakers worldwide would take steps to stimulate their economies by loosening monetary and fiscal policy where appropriate, which would inflate the price of gold.

“Loosening monetary policy, whether by monetising debts or devaluing currency, all that should be positive for gold,” Brice said.

He explained that as countries print more money to address their rising debt levels, this would result in ample liquidity in the financial system looking for investment avenues for returns.

Brice says gold is favoured over other investments assets as it is expected to generate good returns.
“[The money] will all end up in high-yielding investment assets such as gold,” he said.

Brice believes gold is a safe haven, but he said the only risk to the gold price rally would be if all the current economic problems did not exist, which is a very low probability outcome.

However, he conceded that in good economic conditions when equities would rally, the gold price would probably weaken. In that scenario the gold price, which has rallied 43% from the bottom of the financial crisis in December 2007, would be in correction.

Brice pointed out that in the last 15 years, central banks around the world have always been net sellers of gold, until 2010. However, Asian central banks remain underweight on gold as a percentage of their total foreign exchange reserves, according to information from the World Gold Council and Standard Chartered Research.

For example, China holds 1,054 tonnes of gold, which makes up of only 1.6% of the total value of its reserves. The Bank of Japan holds 765 tonnes or 3.2% of its total reserves, while the Monetary Authority of Singapore holds 127 tonnes of gold which constitute 2.4% of its total reserves value. As at June 30, BNM’s reserves included US$1.76 billion in gold. The average percentage of gold reserves worldwide stands at 11.1%.

“So if China wants to get to 11% (on par with worldwide average), it would have to purchase US$300 billion worth of gold. Clearly, they are not going to do that because it would push the gold price a lot higher than US$2,100, and they can’t physically do that. But even to keep the gold price at US$1,600 they would have to purchase US$10 billion of gold a year,” he said.

The higher demand for gold as a foreign exchange reserve by central banks around the world, Brice said, would help to push the gold price a lot higher than what it is today.

This article appeared in The Edge Financial Daily, August 2, 2011.

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