Gold prices may hit $1,500 (Dh5,509) an ounce in the next 12 to 15 months, Gary Dugan, the Chief Investment Officer (CIO) of Merrill Lynch, said yesterday.
Dugan termed his apprehensions of gold striking such a high as a "fear" that may come true. He reasoned that such a price would mean the other commodities and streams of investments have been shunned by investors.
With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of "the most trusted currency", Dugan said. "We have never seen such a rush to buy gold. It's bringing in security and it's still affordable."
Merrill Lynch commodity price forecast authored by Dugan showed that gold prices can rise from the currently prevailing $913/oz to $1,100/oz in the first quarter of 2009 and to $1,150/oz in the second quarter. "While demand for gold has been rising production has been declining. South Africa, which accounts for the major share of global gold production, is facing political issues and has energy problems," Dugan said.
With reports of declining returns from other investment options, "cash" – keeping money safe in banks and investing in government bonds – is the option in front of investors, Dugan said.
"Fear" and eventual decline of the greenback are the two factors that will drive gold prices, he said. While commodity markets could also bounce back in the first half of the year, a rebound is likely to be short-lived in the absence of strong US consumer demand.
Precious metals, led by gold, could enjoy a more sustained rally with gold benefiting from a weakening of the dollar in the second half of the year, Dugan said.
Dugan said the greenback, which has been strengthening for the past few months, will decline in value by the middle of this year. "That's when people will begin to realise that President Obama's policies are not having the desired impact," he said.
Investors could also look to private equity, which produced strong returns during the downturns in 1991 and 2001, on an opportunistic basis. Some hedge fund strategies may be worth following but hedge funds should be treated with caution, Dugan said.
Returns from private equity should remain in single digits in 2009 and a return of beyond 10 per cent should be treated as "fair value", he said. "Investors should remain cautious. They need to be prepared to take profits. We think any such rally would run out of steam by the second half of the year."
Low risk assets could offer private investors the best prospects of attractive returns in 2009 as the world's leading industrialised nations face recession, Dugan said. With governments around the world striving to tackle the economic crisis, private investors could find value in a cautious approach towards asset allocation. Options include high-grade corporate bonds and high-quality, high-yielding equities in defensive industries.
"Investors will look to long-term US government bonds as an important barometer of the progress of global recovery," said Dugan. "Sharply rising bond yields will show that the governments have overspent."
While earnings downgrades are likely to dominate the first quarter of 2009, a rally in global equity markets could be on the cards for the first half of the year with consumer and cyclical stocks among the potential beneficiaries, Dugan said.
Broad equities indices could also offer trading opportunities to private investors. "Equities could outperform as an asset class in 2009 unless there is a serious deflation risk. Our view is that deflation will be avoided," he added.
Selective investment in high-grade corporate bonds could also provide attractive returns, Dugan said.