By David Berman
UBS economist Larry Hatheway is cutting his recommendation on precious metals from “overweight” to “neutral,” thanks to receding economic risks and a recovering global economy.
“The recovery in the advanced economies is showing more signs of strength and sustainability,” he said in a note. “Inflation fears are overdone, in our view, in emerging and developed economies alike. And worries that Fed easing (‘QE2’) would lead to a dollar collapse and ‘currency wars’ have proven unfounded (as we always thought they would be).”
In other words, he’s not overly keen on gold right now because the financial demand for precious metals is declining. At the same time, bond yields and stock prices are climbing higher with an improving economic backdrop, which raises the opportunity cost of holding gold.
“Gold is unlikely to out-perform if cyclical risk premiums fall,” Mr. Hatheway said. “As a result, we believe it is correct to pare back overweight positions to neutral.”
As for a hedge against the U.S. dollar, he noted that its negative relationship to the dollar (rising when the dollar falls) hasn’t actually been playing out since 2009. While the trade-weighted dollar index has been mostly flat since 2009, gold prices have risen, most likely because of sovereign risk emanating from the euro zone.
“To be sure, we’re not yet ready to consign European sovereign risk to the history books,” he said. “But other ‘fear factors’ hitherto supporting gold prices are receding. Expectations regarding the durability of the US economic recovery are improving, while European activity and confidence data are also on the rise.”
After surging 29.5 per cent in 2010 and hitting a record high above $1420 (U.S.) an ounce, gold prices have been in retreat so far in 2011. They fell as low as $1311 an ounce last week, down 7.5 per cent year-to-date.
However, Mr. Hatheway is keen on another type of gold: Black gold, otherwise known as crude oil. Energy commodities, he noted, have underperformed other commodities, but should get some traction with an improving economy. In particular, crude oil prices are at the low end of his fair value estimates.