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Gold risks correction when Mideast stabilises

Gold may be vulnerable to rising rates, economic recovery.

March 4, 2011 12:23 by

Gold risks resuming January’s downtrend if unrest in the Middle East dissipates, as the prospect of rising interest rates and steadier economic growth curb investment, GE Asset Management’s portfolio manager for commodities Ben Ross said.

The precious metal  recovered from its biggest one-month loss in more than a year in January to hit record highs above $1,440 an ounce this week as violence flared in Libya after weeks of unrest in the Middle East and North Africa.

But a continuation of those gains will depend heavily on the crisis in the region spreading.

“Gold could continue to go higher if geopolitical risks remain, but longer term, on a 12-18 month time horizon, should calm be restored in the Middle East, should European sovereign debt situation stabilise and the economy continue to recover, then I think gold will trade lower,” Ross said.

Many jurisdictions’ record-low interest rates since the start of the financial crisis have benefited gold prices, as low rates cut the opportunity cost of holding non-yielding assets like bullion.

Gold prices have already retreated from this week’s highs after the European Central Bank hinted that an interest rate rise in the euro zone may be imminent.

Ross said he sees “a good probability” that the U.S. Federal Reserve will raise U.S. rates in the next 12-18 months. “When they do that, it could perhaps be the catalyst that takes a lot of this investment money out of gold,” he said.

Another perceived driver of the recent rise in gold prices, inflation, will not necessarily come to gold’s rescue in this scenario. Gold is often seen as an asset that holds its value in an inflationary environment.

“I am more in the camp of hedging inflation with a broader basket of commodities, rather than just gold,” said Ross. This too may apply to hedging against geopolitical risk, he added.

“When I look at the Middle East and what is happening there, I think, what would I rather hold — gold, or something that is impacted from a supply standpoint, like oil, or petroleum products?” he said.


GE Asset Management is wholly owned by General Electric Co , and is one of the largest institutional asset managers in the United States, investing chiefly in equities, fixed income, and alternative assets.

Its total assets under management came to $119.45 billion at the end of 2010, including some $45 billion from the GE pension fund. Its commodities fund is around $400 million in size.

The commodities fund was underweight gold and silver  last year, though a stronger allocation to platinum and palladium meant it was overweight precious metals.

The platinum group metals, whose heavy exposure to the car market makes them sensitive to the economic cycle, have been widely tipped to rise this year.

Ross said the fund plans to maintain its current positioning on precious metals for the present.

“(We are) more bullish on palladium and platinum, the platinum group metals,” he said. “Given some of their very strong demand fundamentals and very big supply constraints, we find those more attractive than the other precious metals.”

He was less impressed by silver, however. Although it was one of the best performing precious metals last year, posting gains of 83 percent, and has hit 31-year highs this week near $35 an ounce, its volatility tends to make it unpopular with longer-term investors.

(Reporting by Jan Harvey)

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