Investors should keep 2 to 5 percent of their portfolio in gold as the yellow metal still has upward momentum to hit US$1,300 within three to six months, underpinned by potential geopolitical risks and fundamental floors, a veteran gold investor said.
“The fundamental support, the marginal cost of producing gold, which comes at US$1,050 to US$1,100, should be the fundamental floor. As soon as you go to that level, gold mines get closed down,” Gary Dugan, chief investment officer of Asia and the Middle East at leading private bank Coutts & Co., told the Hong Kong Economic Journal’s EJ Insight in an interview.
“We believe there are geopolitical problems around the world, like the islands dispute between China and Japan with the US involved, plus recent issues in Thailand, which will still lead to strong gold demand,” said the Singapore-based investment manager with 30-year experience.
US Vice President Joe Biden met Chinese President Xi Jinping this week to try to ease tensions after Beijing set up an air defense identification zone over the East China Sea. China and Japan, a US ally, are locked in a bitter dispute over the Diaoyu islands, known in Japan as the Senkaku islands.
Meanwhile, several major central banks like the Bank of Japan and the European Central Bank might adopt “significant expansionary quantitative easing”, which would counter the impact from an expected tapering of the US Federal Reserve’s massive bond-buying program, Dugan said.
The yen hit a more than six-month low against the dollar and weakened toward a five-year trough against the euro after Reuters reported that the Bank of Japan might consider more monetary easing on top of its US$70 billion monthly bond-buying operation.
As such, there is limited “downside risk”, Dugan said. He forecasts gold price to rise to US$1,300 an ounce within the next three to six months. “That level means you won’t make a huge amount of money, but it’s a comfortable holding of store of value,” he said.
“If you are holding gold for the long term, then hold physical gold, which has no financial risk and not tied to markets. But if you are looking for 5 to 10 percent upside [in the short term], then better use exchange-traded funds, which offer a cheaper way of trading.”
However, Dugan has been warning his clients to be wary of “jumping in too quickly” as the yellow metal may break US$1,200 in the short term.
UBS Investment Research on Monday cut its 2014 gold price outlook to US$1,200 from US$1,325 previously. In recent months, Bank of America Merrill Lynch, HSBC Holdings Plc (00005.HK), Goldman Sachs and other investment banks have lowered their forecasts for gold prices.
Gold for immediate delivery eased 0.59 percent to US$1,236 an ounce as of 3:52 p.m. Hong Kong time Thursday, after rallying 1.67 percent in the previous session. The yellow metal has lost over a quarter of its value this year as institutional investors have switched their bets to rallying equities, putting it on track to its first annual loss in 13 years.
Financial, environmental plays
China’s stock market is likely to regain its status as the global growth leader as overseas investors are betting that Beijing will press ahead with a package of reforms in the world’s second-largest economy.
“If you are looking for a place to invest in emerging markets, China just stands out. It’s a place that has constant reform, better quality of growth and more powerful story,” Dugan said, adding that Chinese equities account for roughly 30 percent of his Asia portfolio excluding Japan. The bank has a total of 30.5 billion pounds (US$49.95 billion) under management as of September 30, 2013.
The Chinese market looks set to grab a large portion of the capital flowing back into emerging markets through 2014, he said.
The benchmark Shanghai Composite Index has declined 1 percent this year while the CSI 300 Index has dropped 2 percent.
“If you have a constructive view of the Chinese economy for the next 12 months, the lowest valuations are certainly in the financial sector,” Dugan said.
His team is also overweight in players in the environment sector, which he believes is independent of economic growth. “Authorities are very committed to ongoing spending in the environmental sector for clearer skies and better health of their population,” Dugan said.
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