Coutts & Co. scaled back gold holdings as prices fell through $1,600 an ounce, saying that a return to the peak isn’t likely unless there’s a crisis in the Middle East, a weaker dollar or a jump in inflation.
The private-banking division of Royal Bank of Scotland Group Plc holds about 1 percent to 2 percent in its portfolios, compared with 6 percent to 7 percent at the end of the third quarter, according to Gary Dugan, chief investment officer for Asia and the Middle East. Bullion dropped through the $1,600 level in February as prices retreated for a fifth straight month.
Gold fell into a bear market in April as investors sold the metal in favor of riskier assets, spurred by expectations that the global economy was recovering and stimulus programs would be reduced. Holdings in exchange-traded products slumped by the biggest amount ever last month as the Standard & Poor’s 500 Index reached an all-time high. Dugan said in August that gold would extend its rally as weaker currencies boosted demand, with his comments preceding an advance to an 11-month high in October.
“To suggest the gold price makes a lot of upside from here requires either a global crisis or a re-emergence of inflation,” Dugan said in an interview in Singapore yesterday. “I can’t see in the next 12 months, a significant upside surprise on inflation, other than a geopolitical risk that leads to the oil price going up. We still have all the makings of a potential crisis in the Middle East.”
Gold is 13 percent lower this year, after rallying for 12 years, even as central banks around the world including the U.S. Federal Reserve print unprecedented amounts of money to strengthen their economies. Bullion for immediate delivery was at $1,461.75 an ounce at 6 p.m. in Singapore. Prices have retreated 24 percent from the record $1,921.15 in 2011.
Paul Singer’s Elliott Management Corp. and John Paulson’s Paulson & Co. are among investors sticking with bullish bets even after they lost money on the metal. Paulson has said gold is the best protection against currency debasement and inflation, while Elliott said it remains the best store of value and will rebound as governments haven’t found a solution to their debt.
The Fed said on May 1 that it will keep the monthly pace of bond purchases at $85 billion, a third round of so-called quantitative easing known as QE3. Still, Deutsche Bank AG, Citigroup Inc., UBS AG and Barclays Plc -- the biggest currency dealers -- predict the dollar will gain as much as 9 percent versus the euro by Dec. 31 as the U.S. economy outperforms.
“If everyone’s doing quantitative easing, then every currency is under the same pressure from QE, and therefore there’s no relative winners or losers,” said Dugan. “Before, everyone’s view was it was going to be the U.S. that was doing the massive quantitative easing, which undermined the dollar, and therefore that led people to want to own gold.”
European Central Bank President Mario Draghi cut the euro area’s benchmark interest rate to a record low on May 2 as the region’s recession deepened, and said yesterday policy makers are ready to reduce rates even more if needed. The Bank of Japan in April announced unprecedented monetary easing aimed at delivering a 2 percent inflation rate within two years.
Gold plummeted 14 percent in the two days through April 15, the worst decline since 1983. While the price has rebounded from a two-year low on April 16 as coins and jewelry demand from the U.S. to China and India increased, bullion is about 6 percent below the level that preceded the rout.
“Immediately after that setback, we became tactical buyers below $1,400 for a recovery up to $1,550,” Dugan said. “As soon as we got below $1,400, there’s a lot of jewelry demand and investment demand, particularly in India and China.”
In August, Dugan said in an interview that gold would climb further as emerging-market central banks and investors accumulated the metal to protect against weakening currencies. Gold traded at about $1,640 at that time, and reached $1,796.05 in October. ETP holdings expanded to a record in December.
U.S. consumer prices rose 1.5 percent in March from a year earlier, the lowest since July. The difference between yields on 10-year notes and similar maturity Treasury Inflation Protected Securities, used to gauge traders’ inflation expectations, is near the lowest since September.