Gold to test US$2,000 level amid low interest rates and rise in demand

After hitting a record US$1,700 an ounce last year, the yellow metal is seen as a preferred choice as investors diversify their portfolios

PUBLISHED : Thursday, 10 January, 2013, 12:00am
UPDATED : Thursday, 10 January, 2013, 4:21am

Gold may test the US$2,000 threshold this year, say fund managers and gold traders, who believe low interest rates and rising demand for physical gold from Asia will boost prices.

According to British fund house Schroders, gold has generated handsome returns for its investors - 461 per cent - in the past 10 years.

Gold prices rose more 4.8 per cent last year to US$1,675 an ounce after climbing 10 per cent in 2011. Although not a bad performance for an asset class, it dims in comparison with the yellow metal's own track record in 2010, when it rose 30 per cent, and in 2009, when it gained 24 per cent.

Schroders' commodities and currencies product manager Matthew Michael says gold may well test a new record of US$2,000 an ounce this year, after reaching US$1,700 last year.

"When interest rates are so low, investors are looking for better opportunities than bank deposits. Gold is definitely one of the choices to diversify their portfolios," Michael said.

The United States Federal Reserve last month said it would hold interest rates near zero until the nation's unemployment rate fell to 6.5 per cent as it laid out plans to pump more money into the economy.

This follows its third round of so-called quantitative easing in September, under which it pledged to buy US$40 billion of mortgage-backed securities each month, maintaining the ultra-low interest rates.

The European Union and Japan also announced their monetary easing policies that same month.

While the main goal of these measures is to boost the domestic economy, they also give banks more cash to splash out, which, Michael said, would benefit the gold market.

Gold represents only about 1 per cent of all global investment assets as most investment funds prefer stocks and bonds. Central banks in general also have a fraction of their assets in gold.

"Even if central banks or investment funds were to slightly increase their holdings in gold, it would substantially push up gold prices," Michael said.

The middle classes in Asia have boosted the demand for physical gold, an obsession in the region.

The latest report from the World Gold Council shows demand for the metal at close to 1,085 tonnes, or about US$57.6 billion, in the third quarter of last year. That represents a 3 per cent jump from the previous quarter.

Although 11 per cent down on 2011's record-breaking third quarter, the signs still point to sustained long-term demand for coins, jewellery, industrial gold and gold bars held by banks and exchange-traded funds.

Invesco's chief investment officer for Asia, excluding Japan, Paul Chan Pak-kui, said gold should be part of this year's investment portfolio because the more the world resorted to monetary easing, the more would paper currency be devalued.

"In that case, gold becomes an alternative store of value and a hedge against inflation," Chan said.

"In addition, emerging-market demand for gold and that from Chinese and Indian consumers in particular will rise with income growth, which will be another driver for gold in the medium term."

Haywood Cheung Tak-hay, the president of the Chinese Gold & Silver Exchange Society, is also upbeat on gold prices. "The low interest rate will encourage investors to buy gold, stocks and properties," he said.

Cheung expects gold prices will hover between US$1,500 and US$1,800 in the first half and climb to US$2,000 in the second.

"Gold saw strong growth in 2009 and 2010. Last year, growth was slower but still the direction is on the upside," he said.

"This year, the economic recovery in the US and the strong economic growth in China will help gold prices test the US$2,000 level."

Cathay Conning Asset Management chief executive Mark Konyn said gold would continue to provide a safe haven amid rising economic and political risks.

But he warned: "Recovery in developed economies remains sluggish at best, suggesting inflationary pressure will remain muted. Therefore, investors should not expect a structural shift in gold prices."