The View from Abroad

Friday, 12 October 2012
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Published in From The CEO

Here at The Investor’s Corner, we try to tap the views of experts from around the world, not simply from those here in the United States.  After all, gold represents real money to the entire world, not just to the U.S.  Still, it’s all too easy to get caught up in our own point of view, particularly since the United States is the world’s third largest consumer of gold (India is the first, and China is second); and the US Dollar is the principal currency of all international transactions.

Today, as gold hovers quietly around the $1,765-per-ounce level, let’s take a look at the Union Bank of Switzerland’s updated view of the yellow metal.Though UBS has had a long and controversial history, it remains the world’s second largest manager of private wealth assets. As such, the influential Swiss organization needs to monitor gold very closely through its investment research department. While some of today’s report repeats what we already know, other parts of the report seem refreshingly novel and direct.

Fiscal-Cliff

On the one hand, UBS reports what we know to be the case about our own Fed – that its role in the debasement of currencies through quantitative easing will be the principal driver of the gold price in the coming year.  In the words of the report, “a $2,000 price tag is not overly ambitious.”

On the other hand, while we have emphasized that the ultimate price of gold has little to do with political considerations, UBS investment researchers think otherwise.  They observe that the US debt ceiling is expected to be reached in early December, and that politicians will work hard to keep the country from reaching a resulting fiscal cliff in 2013.  But since the electorate will emphasize government growth over the budget, the debt ceiling will likely be extended.  If this happens, ratings agencies will downgrade the US credit status, thus weakening the dollar.  Obviously a credit downgrade will bode well for gold.

Perhaps the biggest surprise in the UBS report is its view of the current Presidential race.  Since Romney is more conservative than President Obama, UBS researchers view his proposed hawkish actions towards the Fed as being detrimental to quantitative easing, and therefore towards the price of gold. (Romney has pledged to fire Fed Chairman, Ben Bernanke, if he’s elected President.)  And in what some pollsters would no doubt consider an outlandish prediction, UBS comes out and states “we expect resident Obama to be re-elected, and so from a Fed and QE perspective the current status quo to prevail.”  This projected scenario remains particularly ironic since Vice Presidential hopeful, Paul Ryan, remains a big supporter of a gold standard.

Looking beyond what many would consider its off-the-wall perspective of U.S. politics, the UBS report sees three conditions for “a sustainable gold rally” as being firmly in place:  robust spec buying, “sizeable ETF inflows and physical demand.”  Also, due to initiatives from the Indian government, the rupee has shown considerable strength. This currency strength comes at the right time for gold -- during the heightening of the Indian wedding season in late October.  This is particularly strong news on the demand side coming from the world’s largest consumer of gold.

While some analysts would disagree with some of the UBS report, they should not ignore it entirely.  Nor should you.  The outlook on gold remains promising for those who choose to accumulate the physical metal at current prices.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.

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