Gold is poised to hit new highs this year and next after rising to record levels in November as investors looking for an inflation hedge pile into the metal, Baring Asset Management told Reuters on Thursday. Andrew Cole, manager of the Baring Multi Asset Fund, said further gains in the precious metal, which hit record highs of $1,152.75 an ounce on Wednesday, were consistent with inflation heading higher.
Inflation expectations as measured by an analysis of the bond market have risen throughout the year, he said. "There is a preference for real assets at a time when a monetary policy experiment continues," he said. "We think that gold and the rise in other commodities is all part of that trade, as investors want to own assets that offer some protection against a more inflationary environment."
Gold is often considered an inflation hedge, but analysts have been split this year on the benefits of investing in the precious metal in a largely deflationary environment. Cole says the prospect of inflation may become a reality sooner than expected.
"Some of these inflationary pressures that people have been thinking exist four or five years out from now might appear somewhat sooner," he said. "With unemployment still rising (and) the economy still relatively fragile, it will be interesting to observe how central banks react." Such a question mark over the outlook for monetary policy is creating jitters over the stability of the market for paper currencies, he said.
"We are in a period when there is a greater uncertainty about the conduct of monetary policy globally," he said. "There are big questions about the dollar, and I suspect that 2010 might see bigger questions about sterling." "Most major currencies look pretty ugly one way or another, and gold has benefited from that."
RISK DIVERSIFIER Barings currently has some 2.2 billion pounds under management, of which around 10 percent is invested in gold, Cole said, equivalent to 7-7.5 tonnes of metal. The fund first invested in gold in 2007 as a risk diversifier. Cole says Barings has since kept its positive stance on the metal "as a likely store of value in a period when central banks were participating in what was clearly quite a big monetary policy experiment".
"With all experiments there is the risk of a mistake or an error, and gold might offer some protection in such an environment," he said. The fund has recently switched some of its investments from gold mining shares to bullion itself, in an attempt to diversify against equity market risk.
As gold mining equities become cheap relative to bullion in late 2007 and 2008, meaning the benefits of owning shares outweighed the risks, Barings opted to diversify out of gold and into mining shares, Cole said. "Over the last 12 months, much of that anomaly between gold mining shares and gold bullion has been unwound," he said. "But we continue to want to hold onto gold, so we have switched back into bullion."
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