Bullion Desk

Inflation concerns to drive gold price as high as $1,200/oz next year - UBS

September 8th, 2009

By Melanie Burton

Institutional investors searching for inflation protection may be the next driver of the gold price, according to John Reade of UBS.

Reade expects gold to trade as high as $1,200 per ounce next year, he said.

"The bottom line for gold is that you don't need to get inflation for gold to perform well - all you need is a growing number of people to be concerned about inflation for gold to perform well," he told reporters at the Dow Jones-UBS Commodities Outlook conference in London.

Reade expects gold to average $1,050 per ounce in 2010 in a range of $900-1,200 per ounce.

While UBS does not expect inflation to spiral out of control, it expects CPI to move higher. But unprecedented interest from institutional clients in inflation protection will presage a fresh influx of funds.

"If we're picking up this unusual interest in inflation already, what's going to happen in 12 months?" he asked.

UBS analysed the performance of gold in several scenarios. When risk premiums are rising, precious metals perform well, and the target weighting holding at 1-8 percent. In a weak dollar environment, the target weighting for precious metals rises to 29 percent.

When the US Federal Reserve is raising interest rates, the precious metals target weighting is 86 percent.

"Precious metals is the only asset class you want to own in a rising inflationary environment," Reade said.

In this scenario, precious metals target weighting in a portfolio stands at 99.95 percent.

The dollar will decline somewhat over the next few years, UBS believes. Since the Fed fund target rate is 0-0.25 percent, its next movement must be to raise rates.

"If you're concerned about the dollar falling, inflation rising or the Fed funds rate, gold will have a more important role in tactical allocations in future," Reade said.

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