KUALA LUMPUR: In an investment climate shrouded in uncertainty, gold seems poised to provide a desirable annualised return of 13% over the next three years and should peak at US$2,100 per ounce in 2014.
Standard Chartered Bank chief investment strategist Steve Brice said gold remained the group's favourite and most interesting long-term commodity.
Brice was bullish on the outlook for gold. A reason for this was attributed to stronger economic growth in China and India is expected to lift disposable incomes in the coming years, therefore providing a boost in demand for gold.
Aside from this, rising debt levels and fears of sustainable economic recovery in the West have reduced central banks sensitivity to inflation. Gold has typically done well during negative real interest rates environments, which are likely to continue for some time in the US and UK with inflation accelerating and interest rate hikes to be done in the distant future, said Brice during a media briefing yesterday on the investment outlook for the second half of this year.
“Based on history, gold has done well during periods of negative US real yields and gold falls when in positive real interest rate environments. We expected the Fed to hike interest rates from the third quarter of next year,” he added.
Another reason for his bullish take on gold was Asian central banks remaining underweight on gold and the shift from global central banks being a source of net supply of gold to a situation where they are increasing their gold reserves.
“For as long as I've been working, central banks have always been net suppliers of gold but we saw them turn into net buyers last year,” he said.
Finally, gold supply is likely to be constrained in the near term although investment activity is starting to pick up considerably.
“The lead-lag relation between increased investment and increased output suggests prices will remain high for some time,” he added.
For the second half of this year, Brice said equity markets were expected to generate “normal” returns of between 18% and 30% on an annualised basis, while traditional assets classes such as cash and bonds will generate meagre returns.
“We are neutral on the global equity market, underweight on bonds, neutral on cash and overweight on alternative assets. For the Malaysian equity market, we are also neutral as the equities are neither cheap nor expensive. We would only be overweight on the Malaysian equity market if the PE was 12 to 13 times,” he said.
The FTSE Bursa Malaysia KL Composite Index is currently trading at a price to earnings ratio of 16.8 times.
Key potential risks that could have implications on the investment climate include the European sovereign risk and prolonged slowdown in the United States. Brice said sentiment had improved as the odds of Greece avoiding a near-term default increased with the passage of austerity measures.
While there were concerns over how effective the implementation of these measures would be, Brice said another concern among investors would be how the European Central Bank (ECB) would react should the rating agencies downgrade the country's sovereign debt rating to default, as the ECB has previously said that it would not allow defaulted debt to be used as collateral in money market operations. Thus, a default would likely bankrupt the country and increase the contagion risk
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