Bloomberg News

Morgan Stanley Positive on Gold as ‘Perfect Storm’ Continues

September 13, 2011

(Updates with quote in fourth paragraph.)

Sept. 13 (Bloomberg) -- Gold’s “perfect storm” is expected to continue on renewed investor demand for haven assets, potentially driving the metal to its 1980 inflation- adjusted record, according to Morgan Stanley.

The firm retains a positive view on gold for its role as portfolio insurance against a “formidable cocktail” of macro challenges including financial systemic risk, concern of a double dip recession and sustained low interest rates, its analysts including Peter Richardson wrote in a report.

The outlook for gold is now in favor of the firm’s “bull case” target of $1,625 an ounce this year and $1,819 an ounce in 2012, they said. Bullion now has an estimated 85 percent probability of trading between $1,819 an ounce and $2,085 an ounce next year, according to Morgan Stanley’s calculations.

“As the source of downside risk to growth is the result of policy error in relation to the handling of sovereign debt in which the outcome is likely to be an extended period of negative real interest rates in the developed world, the forecast risk in gold is skewed firmly to upside,” the analysts wrote.

The firm’s “base case” calls for gold to average $1,511 an ounce this year and $1,624 an ounce in 2012. Immediate- delivery gold, which reached a record $1,921.15 an ounce on Sept. 6, has averaged $1,523 this year. It traded at $1,832.57 an ounce at 12:19 p.m. Singapore time.

Gold is still below its nominal high after accounting for inflation. Spot gold’s $850 an ounce peak in January 1980 is equivalent to $2,330.51 today after adjusting for inflation, according to the U.S. Labor Department’s inflation calculator.

Bull Market

Bullion is in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify away from equities and some currencies, as well as hedge against inflation. The metal is up 29 percent this year, outperforming global stocks, commodities and Treasuries.

“We would expect a meaningful challenge to the previous inflation adjusted all-time high gold price” on increased risks from the contagion effects of the debt crisis in Europe, continued uncertainty over U.S. debt and the likelihood of extended low rates in response to weakness in the U.S. economy, the analysts said.

The Federal Reserve pledged to keep its benchmark interest rate at a record low at least through mid-2013 to revive a recovery that’s “considerably slower” than anticipated. The Federal Open Market Committee is “prepared to employ” additional tools to bolster an economy hobbled by weak hiring and anemic household spending, it said Aug. 9.

Gold is also benefiting from the changing foreign exchange environment, according to Morgan Stanley, as low rates in the U.S. will provide little support for the dollar. Bullion, priced in dollars, typically moves inversely to the U.S. currency.

--Editors: Richard Dobson, Ovais Subhani

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net


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