Coutts adds gold as demand in China climbs

Coutts & Co. is adding gold for investors as rising wealth in China and increasing political risks including in Ukraine spur demand, helping prices rally from the biggest annual decline in more than three decades.

The private-banking division of Royal Bank of Scotland Group Plc holds 3 percent to 4 percent in its portfolios, from 1 percent to 2 percent last year, said Gary Dugan, chief investment officer for Asia and the Middle East. Coutts had 29.7 billion pounds ($49.4 billion) under management as of Dec. 31.

Gold rebounded this year as rising consumption in Asia and emerging-market turmoil boosted demand. The value of bullion held in exchange-traded products climbed 10 percent to $75.5 billion this year as prices advanced and holdings increased in February for the first time in 14 months. China surpassed India as the world’s largest user last year as demand expanded 32 percent, according to the World Gold Council.

“There’s a real robustness to physical demand and the spark that we got from Ukraine took us to a spike,” Dugan said in an interview in Singapore on March 5. “But even before that, there was genuine demand from our clients to diversify their wealth into a greater fraction to gold.”

Bullion climbed to a four-month high of $1,354.87 an ounce on March 3 as tension rose after Russia seized the Ukrainian Black Sea region of Crimea. Last month, gold posted the first back-to-back monthly gain since August. The metal was little changed at $1,338.92 by 11:51 a.m. in London.

Bullion’s Peak

In August 2012, Dugan forecast the metal would climb as currencies fell, and gold rose 4.7 percent the next month. Last May, Dugan said a return to bullion’s peak wasn’t likely. Prices that year had the biggest decline since 1981, down 28 percent.

“I still think there are tension points around the world,” he said, citing Ukraine as well as strained relations between China and Japan. “Because it’s an insurance policy, you try and buy it cheap, you don’t ever rush in.” A price of about $1,250 would be a good entry point, said Dugan.

Coutts’ outlook counters speculation from Goldman Sachs Group Inc. to Westpac Banking Corp. that bullion will extend declines in 2014. Gold will end the year at $1,050 an ounce, Goldman reiterated in a Feb. 12 report. Westpac’s Justin Smirk, the second most-accurate forecaster tracked by Bloomberg over the past two years, predicted lower prices as the U.S. recovers and the dollar strengthens.

Asian Buyers

Rising incomes in China are boosting demand for a store of value, said Dugan. Consumption in the world’s most-populous nation rose to 1,065.8 metric tons in 2013, according to the London-based World Gold Council, with refiners in Switzerland working round-the-clock to recast bullion into the higher- purity, smaller-sized bars preferred by Asian buyers.

“Jewelry demand clearly shows the Chinese love affair for gold,” said Dugan. “There was nothing exceptional last year about the Chinese economy to suggest there was a substantial over-demand.”

Gold rallied this year as U.S. data from factory output to retail sales trailed estimates just as the U.S. Federal Reserve scaled back monthly bond-buying. The reduction in the U.S. central bank’s program helped to trigger a 6.6 percent drop in the MSCI Emerging Markets Index of equities in January.

Bullion provided a “good counterbalance” to the rout in emerging-market assets precipitated by the reduction in U.S. stimulus, said Dugan. “Tapering was more a reflection of the end of the global financial crisis, but people realized that even if we like to think that the financial crisis is over, what we have left is a legacy of huge amounts of debt and economies that still struggle to get much momentum.”

ETP Holdings

Holdings in ETPs expanded 0.4 percent in February to post the first monthly increase since December 2012, according to data compiled by Bloomberg. While gold was a favorite asset to bet against or ignore over the past year, that’s no longer the case, UBS AG analysts Edel Tully and Joni Teves said on Feb. 19. They raised their 2014 estimate to $1,300 an ounce from $1,200.

Demand in China will be sustained as incomes expand, supporting prices, according to Credit Agricole SA’s private- banking unit. The market hasn’t yet fathomed the scale of annual Chinese buying, Davis Hall, global head of foreign exchange and precious metals advisory, said on Feb. 24.

“The idea that you make an extraordinary gain from gold has changed,” said Coutts’ Dugan. “Many people have gone back to thinking of it as a store of value.”