Gold rallies here to stay if deficit concerns persist

Gold prices will continue to rise as long as major economies continue to grapple with spiralling deficits, experts said last week after the price of gold surged past $1,500 an ounce.

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The ‘safe haven’ commodity’s surge last week was driven by the Standard & Poor’s decision to downgrade the US’s sovereign credit rating outlook to negative, over concerns it will fail to agree a strategy to rein in its deficits.

At the same time the euro reached its strongest level for a year against the dollar at $1.46 and sterling also hit a dollar-high of $1.66.

Evy Hambro, manager of the £2.9bn BlackRock Gold and General fund, said: “In my view, there are some very large deficits and just because governments come out with reduction plans it doesn’t mean they will actually tackle their deficits in the short term.”

Neil Gregson, portfolio manager on the JPMorgan resources team, said: “Investors must have an eye on those ‘perfect storm’ factors which have supported gold.

“If any of those start to dissipate, such as inflation, global political crises and a strengthening of the dollar, that could start to make investors cautious.”

HSBC Global Asset Management (HSBC Gam), which is the custodian for the world’s largest gold ETF – SPDR Gold Trust – has set a target (sell) price of $2,600 for the asset class.

Charlie Morris, head of wealth opportunities at HSBC Gam, said he expected the gold price to be driven upwards by factors such as volatility in property prices, money supply, inflation and increasing emerging market wealth.

Mr Morris said gold was “the best trade out there” because of the asset class’s high correlation with emerging markets.

“We see gold more as an equity risk trade,” he said. “People tend to think of it as a flight to quality, but I think it is a momentum trade. The performance of gold in the past 10 years has been very similar to the performance of emerging markets and the downside has been much kinder.

“Gold is the leading economic theme and the best trade out there because you can buy emerging markets and get a whole load of volatility, whereas gold just shines – you’re not going to get bad profit warnings from it.”

Max King, manager of the £340.6m Multi Asset Protector fund, agreed the spot price had further to go.

He said the firm had raised its target price to $1,600, but he said it could go higher, reflecting Asian investment demand rather than investor worries over sovereign budget deficits. He said: “There is a big demand from the retail market in China, India and Vietnam.

“People there use gold as they get a negative real return by keeping their savings in cash or putting them in the bank and even in January, when there was a setback in the price because of westerners taking profits, people in Asia bought as never before.”

(Source: http://www.ftadviser.com/InvestmentAdviser/Investments/News/article/20110425/411494dc-6c09-11e0-8843-00144f2af8e8/Gold-rallies-here-to-stay-if-deficit-concerns-persist.jsp)