DBS: Time to add more gold to portfolios

Retail gold jewelery counter in Singapore’s Little India neighborhood; taken October 2018.Retail gold jewelery counter in Singapore’s Little India neighborhood; taken October 2018.

Markets may have recovered from their fourth quarter ructions, but DBS is advising adding more gold to portfolios to stave off the effects of continued volatility.

“We think the markets will stay volatile, at least will normalize in terms of its volatility. We have been trading at a low volatility for quite a while,” Hou Wey Fook, chief investment officer at DBS Private Bank, said on Monday.

The bank took its portfolio weighting on gold to Overweight from Neutral for the second quarter, and its balanced and aggressive model portfolios have a 5 percent tactical asset allocation to the yellow metal.

Hou pointed to recent concerns over global economic growth and signs central banks across the globe would begin turning to ultra-easy policy.

Last month, the U.S. Federal Reserve abruptly ended its tightening cycle, saying it didn’t expect any interest rate hikes this year, and it also indicated it would end its plan to steadily decrease its balance sheet, which it had been doing by not acquiring additional assets to replace those reaching maturity.

“We know there are less and less tools for them to stimulate going forward and that will result in more volatility,” Hou said.

It’s a concern recently highlighted by former Fed chief Janet Yellen in Hong Kong last month, at the Credit Suisse Asian Investment Conference. She noted that interest rates have remained low globally and this left central bankers with fewer tools, and a likely need to rely on measures similar to the extraordinary steps, such as buying financial assets, which were taken during the Global Financial Crisis, starting from 2008.

Hou said those steps were likely to increase volatility, adding that historically, an increase in the VIX, the S&P volatility index, has also been an indicator for higher gold prices.

As an added fillip, the cost of owning gold is no longer prohibitive, Hou said.

“Today, if you own gold, the cost of owning gold is around zero because interest rates are zero,” he said. “In the past, holding gold was expensive because cash was paying 5-6 percent. Today it’s not.”

DBS has raised its 2019 gold forecast to US$1,325 an ounce from US$1,270 previously. For the second quarter, the bank expects gold to average around US$1,320 an ounce.

In the DBS CIO report for the second quarter, analyst Eun Young Lee pointed to forecast from the World Gold Council for central banks of emerging markets to raise their gold holdings to 5 percent of reserves from the current 1-2 percent.

Eun forecast central banks’ gold demand would rise 10 percent in 2019, strongly supporting the gold price.

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