- In the first two months of 2016, gold is the best-performing major asset.
- Despite a rally of nearly 20%, a recent Deutsche Bank note suggested global financial stresses continue to play in gold's favor.
- Seasonal weakness could deliver better buying opportunities in the second and third quarters.
- Motifs mentioned: Precious Metals
When a down-and-out commodity suddenly rallies almost 20% to become the year’s best investment to date, you might figure many on Wall Street would call for the furious run too soon fade.
That’s what made a recent bullish recommendation last week by Deutsche Bank for investors to keep loading up on gold so remarkable.
The investment bank said that while the yellow metal is expensive at more than $1,200 an ounce, rising economic risks and market turmoil mean investors should consider gold investments as insurance.
As Bloomberg.com pointed over the weekend, turmoil across global equity and currency markets has sparked demand for a haven, with speculators raising their net-long position in gold to the highest in a year.
“Gold has been the biggest story of this year,” Dan Denbow, a portfolio manager at the USAA Precious Metals & Minerals Fund, told Bloomberg. “Last summer, people were calling it a barbaric relic, and nobody could care less about gold. Now, it’s slowly generating more and more buying.”
The Precious Metals motif has gained 39.3% in the past month. In that same time, the S&P 500 has fallen 0.4%.
In the past 12 months, the motif has lost 9%; the S&P 500 is down 8.2%.
To be sure, the recovery since the global and European financial crises had delivered a serious blow to gold – just last December, prices had fallen to a five-year low. Some analysts view gold as a safe haven or as a protection against rising inflation, so it typically underperforms during periods when the economy is growing or inflation is low, Bloomberg noted.
But Deutsche Bank said in its note that economic signs now point in gold’s favor, according to a report by CNBC.com. “There are rising stresses in the global financial system; in particular the rising risk of a U.S. corporate default cycle and the risk of a sharp one-off renminbi devaluation due to the sharp increase in China’s capital outflows,” the note said. “Buying some gold as ‘insurance’ is warranted.”
However, even though gold is still way below its levels over $1,900 an ounce in 2011 to around $1,200 an ounce currently, Deutsche Bank acknowledged it still appears expensive at first glance, ranking as the most expensive commodity relative to its 15-year trading history.
“A bit like insurance, which is often a grudge purchase for many, some investors may balk at the current levels,” it said. “We would, however, argue that given the plethora of negative deposit rates globally, the holding cost of gold is now negligible in many jurisdictions, and therefore gold deserves to be trading at elevated levels versus many other assets.”
A common argument against gold is that it is a zero-yielding asset. But with several central banks, including the European Central Bank, the Bank of Japan and Sweden’s central bank, cutting interest rates into negative territory, that erodes some of the advantage of holding cash instead of gold, the bank said.
Slower economic growth may also ease some of the risks gold prices will fall further, according to the bank.
“We think the (economic) risks are to the downside. Gold has tended to underperform in an environment of strong global growth, so whilst not an outright tailwind, slowing growth certainly eases the pressure on gold,” it said in the note.
The changing economic picture has pressured other analysts to boost their expectations for gold. Georgette Boele, a strategist at ABN AMRO, was a former bear but has boosted her year-end price forecast to $1,300 an ounce from $900.
Oversea-Chinese Banking economist Barnabas Gan, the most accurate precious-metals forecaster tracked by Bloomberg last year, last week called bullion a “superhero” because of its performance this year, and said prices could reach $1,400. Still, that would happen only if risk aversion intensifies, he said.
Deutsche Bank did caution that buyers should be patient. “Investors need to be tactical, as to the levels at which gold is bought,” the bank wrote.
Deutsche Bank noted gold prices tend to be stronger during the first quarter of the year, but it expects some seasonal weakness, which means there will be better buying opportunities in the second and third quarters. Indeed, Bank of America-Merrill Lynch noted that buying of gold has been strong, with $5.8 billion of inflows over the past three weeks, the highest three-week inflow since June of 2009, according to CNBC.com.
That could mean a renewed opportunity for investors who think they missed out on the big run-up in gold prices.
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