Philipp Baertschi, chief investment officer (CIO) at Bank J Safra Sarasin, believes that gold has no place in portfolios as long as investors are still searching for yield.
After divesting from gold some years ago, the Swiss private bank reconvened this year to discuss whether it should be added to client portfolios again to act as an inflation hedge and offset US dollar weakness.
The inverse relationship between gold and the US dollar comes from gold being a dollar-based asset. A weaker greenback means that you can buy more gold with fewer dollars. It is also a safe haven asset and hence, is usually seen as a store of value when the US dollar starts to fall.
However, given the higher interest rate environment in the US at the moment, gold is typically seen as less attractive as it doesn't generate interest, Baertschi said, recommending that 'it is better to hold a basket of commodities as an asset class rather than purely investing in gold.'
‘The reason for gold not being part of the portfolio was the lack of return in terms of dividends. With interest rates very low, you had a strong theme of “hunt for yield”, so investors were looking for income returns,’ he told Citywire Asia.
Today, spot gold is trading at $1264.44 per ounce, close to a six-month low, against the backdrop of a firm dollar and the US Federal Reserve’s continued interest in hiking interest rates.
Oil at $90?
The CIO is also taking a tough stance on the potential for oil prices.
In May, Morgan Stanley published a research tsuggesting that Brent oil prices can keep climbing on global demand and maritime regulations, possibly reaching $90 a barrel by early 2020.
Baertschi, however, disagrees.
While he expects oil prices to increase slightly on expectations of growing demand; ample supply especially coming from US shale producers will most likely keep prices low.
‘I don't think it will hit $90 or $100 for a sustained period,' he said.
'It could be driven higher by events, but it won’t be sustained, because a higher oil price would be quite a headwind for the economy and will eventually lead to a slowdown again.'
Instead, Baertschi believes that commodities as a whole make much more sense in portfolios as they are closely linked to the global economic cycle and perform well during periods of high inflation.
A report by the bank further noted that energy and industrial metals in particular have the strongest positive correlation with inflation, and hence, act as an effective hedge.
In addition, the latest global financial crisis notwithstanding, the asset class usually generates equity-like returns while holding low correlation to equities and bonds.
‘If the economy is doing well and you have some risk of overheating in terms of economic growth then you can benefit by holding broad commodities. But then on the gold side, depending on what the dollar is doing, it could lose out,’ Baertschi said.
Bank J Safra Sarasin is positive on commodities as a whole, which are considered alternative investments, alongside private equity and hedge funds.
The overall strategic asset allocation to alternatives recommended by Baertschi’s team for US dollar-based multi-asset portfolios is 10%.