Markets

What's up: US bank says gold will shine even brighter

The precious metal has hit a succession of record highs, culminating in Tuesday's close of US$1,348 per troy ounce.

Hadeel al Sayegh

October 07, 2010

Can gold rally further? The precious metal has hit a succession of record highs, culminating in Tuesday's close of US$1,348 per troy ounce.

There are no signs of a trough in sight, judging by the tone of policymakers at the US Federal Reserve, says the US investment bank Morgan Stanley. The bank revised its "bull case" forecast for the commodity next year to $1,512 per ounce yesterday, up more than 10 per cent from its current position.

"Gold, despite trading at record highs, will also continue to find favour from investors in our view on the back of continued quantitative easing and flat currency devaluation," said Hussein Allidina, the head of commodities research at Morgan Stanley. The minutes from the US federal open market committee (FOMC) meeting on September 21 concluded inflation was likely to remain subdued for some time.

Specifically on gold, the FOMC said "it was prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate". The day after the announcement, gold added 1.4 per cent and has been continuously pushing higher since. In the UAE, the Dubai Multi Commodities Centre yesterday said it registered a 20 per cent increase in the value of gold traded through the emirate to $21.17 billion in the first half of the year. The volume remained steady at 608 tonnes.

With the Fedindicating current economic conditions in the US called for exceptionally low levels for the federal funds rate over an extended period, the expectation is that investment demand will further boost high gold prices. Already, data from the World Gold Council show that since 2002 investment demand as a percentage of total demand has more than doubled to 41 per cent last year, from 14 per cent over the same period eight years ago.

While Morgan Stanley's "bull case" was $1,512 per troy ounce for next year, it said its general forecast was for $1,315. halsayegh@thenational.ae

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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