Northern Trust expects gold to continue climbing until interest rates rise and developed economies get their budget deficits under control, the firm’s chief investment strategist said on Monday.
The U.S. bank, which has more than $600 billion in assets, also raised its asset allocation for gold by five times to 5 percent at its last review in September, James McDonald, Northern Trust’s chief investment strategist said in an interview.
“A rise in interest rates makes gold harder to finance, and makes the opportunity cost higher, and also is a reflection that the economy is getting better,” McDonald said. “We don’t see that happening over the next 12 months.”
Gold has been hovering around record highs of more than $1,300 per ounce in the past weeks, up 16 percent over the preceding three months, on expectations that the U.S. Federal Reserve was likely to ease monetary policy further.
“With respect to quantitative easing, a lot of it has been priced into the market,” he said. “The market’s been pricing it in, so I think this is a case of buy on the rumour, sell on the news.”
On the equities front, McDonald recommends buying stocks such as technology plays that have exposure to and are likely to benefit from emerging market growth. He recommends cutting holdings in companies that rely primarily on developed market spending.
Technology hardware makers such as Samsung Electronics and software plays such as Infosys could be possible buys, he said.
“You want to look for the value-added companies, the ones with the most competitive positions,” McDonald said. “The percentage of capital spending that’s going from traditional spending to technology spending is increasing, so that’s a long term trend.”
Investor risk appetite also remains weak after the global financial crisis, with many of Northern Trust’s clients in developed markets choosing to lower their equities holdings in favour of safer investment options such as sovereign debt.
“After what happened in the past few years, there’s still concern about their level of exposure to equities, so we’re getting clients in developed economies putting more of their money into bonds,” McDonald said.
