Brewin Dolphin recommends underweight gold position

Brewin Dolphin has warned investors that there is no theoretical floor in the gold price and recommended an underweight position in the commodity.

Speaking to Investment Adviser earlier this month, BlackRock Gold & General manager Evy Hambro said the gold price was likely to stabilise near its current levels due to consistent demand from China and central banks and the fact that if the price fell further, gold mines could start to become unprofitable.

The price of an ounce of gold has already fallen from $1,900 in 2011 down to close to $1,200 currently.

Article continues after advert

However, Brewin Dolphin equity analyst Nik Stanojevic has said that there is no theoretical floor because “gold prices are driven by investment (as opposed to industrial) demand”.

He said: “On gold prices we believe that the starting point for any rational investor must be negative due to the improving real interest rate outlook.”

Real interest rates are a combination of the bank rates of developed countries minus the rate of inflation.

Mr Stanojevic said that the outlook for inflation remains low. Given that bank rates are expected to rise in the next few years as well, Mr Stanojevic said “with inflation down and nominal interest rates up, real interest rates should benefit”.

He added: “Gold prices tend to do poorly in an environment of rising real interest rates as the opportunity cost of other asset classes improves relative to gold.”