Gold seen entering long-term bull market as asset bubbles burst

[SINGAPORE] Gold will likely soar to a record within five years as asset bubbles pop in everything from bonds to credit and equities, forcing investors to find a haven, according to Old Mutual Global Investors' Diego Parrilla.

The metal is at the start of a multi-year bull run with a "few thousand dollars of upside" in a world of "monetary policy without limits" where central banks print lots of money and low or negative interest rates prevail, said Mr Parrilla, who joined the firm as managing director of commodities last month. He's worked at Goldman Sachs Group Inc and Bank of America Merrill Lynch.

"As some of the excesses in other asset classes get unwound, gold will perform very strongly," said 43-year-old Mr Parrilla, who has almost 20 years experience in precious-metals markets.

The "perfect storm scenario will mean that gold will perform best when other classes are doing worst." While gold has climbed 24 per cent this year amid low or negative rates, it slumped more than 40 per cent from its record in 2011 through the end of last year to what Parrilla called "very oversold, very distressed" levels.

With the downside only a few hundred US dollars, the risk-to-reward ratio is extremely asymmetric and skewed to the upside, he said in an interview on Sept 14.

Both the Federal Reserve and the Bank of Japan are due to make key policy decisions on Wednesday. While traders see the probability for a US interest-rate hike this week at 20 per cent, analysts' forecasts for action from the BOJ range widely. The limits of monetary policy have just been reached, Nobel laureate Joseph Stiglitz said on Monday, referring to the BOJ.

Mr Parrilla joins a slew of investors who are bullish on gold because of low borrowing costs and central-bank bond buying. Billionaire bond-fund manager Bill Gross has said there's little choice but gold and real estate given current bond yields, while Paul Singer, David Einhorn and Stan Druckenmiller have all expressed reasons this year for owning the metal.

Some are not confident prices will rise. The probability of three rate hikes through end-2017 means there's little room for rallies, according to Luc Luyet, a currencies strategist at Pictet Wealth Management. Cohen & Steers Capital Management, which oversees US$61 billion, has pared its gold allocation, while investor Jim Rogers said after the Brexit vote in June that he'd rather seek a haven in the US dollar than bullion.

While global bond yields are still very low, they've been rising. Yields have climbed to 1.22 per cent from a record low 1.07 per cent in July, according to the Bloomberg Barclays Global Aggregate Index in data going back to 1990.

The odds of the Fed hiking in December have risen to 56 per cent after the US reported higher-than-expected inflation in August, from just below 50 per cent on Thursday.

Bond-buying and negative rates in parts of the world have distorted the valuation of government bonds, creating a textbook bubble, Mr Parrilla said. The yields are forcing investors to lend further out, contributing to "what I believe is the biggest duration bubble in history," he said. This is sending people to credit markets, lending to "weaker and weaker credits for longer and longer," and to equity markets, leading to financial-asset inflation, he said.

"If we're able to normalise global monetary policy, and we can do that in a way that doesn't result in the implosion of some of the bubbles we've been building, the appeal of gold as a safe haven might diminish," Mr Parrilla said.

"But I think it's highly unlikely we will have a very smooth unwind of all these years of monetary excess."

Spot gold traded at US$1,315.92 an ounce on Tuesday, compared with an intraday record of US$1,921.17 in September 2011, according to Bloomberg generic pricing.

Mr Parrilla will initially be responsible for promoting and building the £60 million (S$106.7 million) Old Mutual Gold & Silver Fund to institutional investors in Singapore and other markets, the company said on Aug 24. It has a predominantly long-equity bias mostly through gold and silver miners.

BLOOMBERG