Capital markets are recovering from the blow of the Covid-19 pandemic.
Still, the world’s wealthiest investor advisors are encouraging them to continue increasing their gold positions. Many analysts are wary of this recovery. They are suspicious of the long-term effects that central banks take to revitalize the economy.
Before the Covid-19 pandemic, most private banking entities recommended that their wealthier clients do not invest in gold or only invest in a tiny percentage.
However, the pandemic has changed the situation. Some entities now recommend that investors increase their exposure to gold by up to 10% of their investment portfolio. The substantial stimulus plans for the economy that central banks are putting in place are going to reduce bond yields and may trigger inflation. It would devalue other assets and currencies that appear in investment portfolios.
In this situation, gold is shown as the best alternative, since it constitutes protection against inflation and deflation. The metal will benefit comparatively if the returns on assets such as bonds or stocks fall.
So far this year, gold has risen 14% to $1,730 an ounce. Private banking experts believe that there is still room for the rise. Lisa Shalett, the head of investments and Wealth Management at Morgan Stanley, stated that the increase in the mass monetary and expansionary monetary policy would cause a devaluation of the dollar. The decisions of the Federal Reserve are going to anchor real interest rates. They will increase the interest of gold as an alternative asset.
Any movement in bonds could trigger an extreme reaction in gold
The nine private banking entities have recommended that their clients increase their exposure to gold.
Four of them have issued forecasts, and all believe that the price of gold will close the year at a higher level than the current one.
UBS, the world’s largest wealth manager, estimates that the price of gold will reach $1,800 an ounce at the end of the year in its base scenario. This is driven by the meager interest rates and by the investors’ desire to protect their portfolios.
Analysts at the Swiss bank do not rule out even reaching $2,000 an ounce amid the second wave of coronavirus outbreak. Kiran Ganesh of UBS’s Investment department stated that people have become very nervous about the recent stock market rally. They are looking for ways to make sure their portfolio works well in a wide variety of scenarios.
For its part, Morgan Stanley increased its position in commodities, including gold, by 5% at the end of March. The bank is unlikely to recommend a position higher than 10% of the gold portfolio. Still, it could do so if there is a significant spike in inflation that forces decisions to protect wealth.
This increase in investment gold demand could have a significant impact on the price of gold. Keep in mind that any movements in the bond and stock markets, which are estimated to be over $200 trillion, trigger an extreme reaction in the much smaller gold market: less than 5 trillion dollars.