Rothschild bullish on gold as central bankers get out of their depth

Equity markets cheered after Mario Draghi promised recently to do “whatever it takes” to save the euro, but Rothschild Wealth Management believes this was just another sign of central bankers “moving further into uncharted territory”, and that gold could benefit as a result.

Dirk Wiedmann (pictured), head of investments at RWM, said the precious metal could not be manipulated by central bankers, in contrast to paper currencies.
He therefore called the environment “extremely positive for gold”, although he cautions investors in it should expect a volatile summer.

Bullion is up 1.4% over the past month at $1,623.94 per troy ounce, and Wiedmann says it could go further.

“The Federal Reserve is preparing for another round of monetary stimulus, the Bank of England expanded its bond-buying programme again in July and the ECB has suggested it may step in to reduce the borrowing costs of countries such as Spain and Italy, which could lead to a further surge in the size of its balance sheet.

“Even previously conservative central banks such as Switzerland’s are risking the stability of their monetary system.”

All of this, Wiedmann says, “lay the foundation for a surge in inflation, providing a monetary solution to the debt crisis in the West. They are also leading investors to re-focus on protecting their wealth – gold is a natural and unrivalled destination.

“What’s more, if concerns about bank failures get stronger, a break-up of the euro moves closer or investors lose confidence in government bonds, the gold price could move much higher, eclipsing the record of $1900 per ounce set in September last year.”

RWM holds “large positions in gold for the medium term [as] a tangible asset, a true safe haven and, best of all, its value cannot be eroded or easily manipulated by central banks.”

RWM finds few reasons to be cheerful about other asset classes.

It finds “little value in government bonds and [has] very low allocations”, preferring investment grade corporate bonds, high yield bonds and emerging market debt.

Now is the wrong time to raise equities weightings, RWM adds. US shares may be 5% undervalued on its analysis, but its main scenario expects real earnings there to fall at an annualised rate of roughly1% to 2019.

“This is because we believe economic growth and earnings potential will remain subdued and also because the level of profits today has overshot its potential and should correct back to a more sustainable level.” The rising of taxes and cutting of spending in Washington next year – colloquially called the ‘fiscal cliff’ – is also worrying, RWM notes.

It calls the the economic news from the eurozone “almost universally bad, with unemployment in the region rising to 11.1% in May, its highest ever level in the euro era.”

German business confidence also fell, in July, as the debt crisis “takes an increasing toll on the eurozone’s largest economy”.

RWM writes against this backdrop: “We believe global GDP growth is likely to remain modest, with the IMF cutting its forecast from 3.6% to 3.5% in 2012, and from 4.1% to 3.9% in 2013.”

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