With US interest set at near zero, investors should also turn to govt bonds
The gold-bullion spot price in London surged to US$1,700 an ounce on Wednesday after the US Federal Reserve said it would keep interest rates steady through at least late 2014, sending investors seeking higher yields in non-dollar assets including gold.
To brace for a global slowdown, China and India have plenty of room to spend more to boost their economies but Thailand’s capacity is limited by previous and present wastage of resources on populist policies, according to an academic.
Investors will speculate on gold and commodities and subscribe more to government bonds, experts said.
Teerana Bhongmakapat, economics dean at Chulalongkorn University, said the Fed had prepared for the repercussions from the sovereign debt crisis in Europe.
“Though some economic indicators, such as employment, have pointed to a US economic recovery, the euro zone is still trapped in a debt crisis, which will have repercussions on the US economy in the next two years,” he said.
The Fed will still need to inject money into the economy and maintain its low interest rates, he said. Fed chairman Ben Bernanke has said it does not expect to raise interest rates until late 2014 and rates would remain at the target range of zero to 0.25 per cent.
Asia will not be affected much by Europe’s debt woes and many countries such as China and India will still be able to use public spending to boost growth thanks to their low level of public debt. China’s public debt is only about 20 per cent of gross domestic product. If the world economy does not fall into a deep recession over the next two years, China will not face serious trouble, Teerana said. However, if a deep recession takes place, China is also vulnerable because of a high level of bank lending that could turn into bad loans, he warned.
Thailand’s exports could be affected but not severely, he said.
“The Thai government has some room for investment, but if we in the past had saved more we could do much more investment this year,” he said.
Governments over the past several years wasted money on populist policies, he said.
Investors are likely to speculate on gold and commodities. Stocks will not offer good returns, as businesses will not be able to expand because of low global growth.
Real estate is not a good option because of a lack of liquidity and the slow growth of the economy, he added.
Government bonds would be better than bank deposits as deposit interest is low worldwide, Teerana said.
He agreed with the central bank cutting the policy rate by 0.25 percentage point on Wednesday to 3 per cent. A deeper cut would discourage people from saving.
Vorapol Socatiyanurak, secretary-general of the Securities and Exchange Commission, said low deposit interest might encourage people to invest in the stock market but there are also other factors affecting investor decision-making.
Local analysts have predicted that the gold price will continue rising over the next three years.
Tipa Nawawattanasup, chief executive officer of YLG Bullion and Futures, said the announcement of the Federal Open Market Committee had an impact on the increase in the gold price on Wednesday. It signalled that the US economy would not recover in the next three years, so investors have shifted their investment focus to gold.
“The gold price is now on an upward trend after passing the key resistance level of $1,680 per ounce,” she said.
The oil price will also be on an upward trend, as the West places further press on Iran, a major petroleum producer.
This is also a reason that the gold price is surging in the short term.
“Even the announcement that the Fed will keep interest rates low is within the expectations of analysts,” Tipa said. “This will not affeact the gold price. But the time that was fixed surprised the market, as reflected in the immediate surge in the gold price. That’s why we see this time as an upward trend of the gold price.”
The company has retained its target for gold this year at the level of $2,000 per ounce. However, the gold price remains volatile.
Thanarat Possawong, managing director of Hua Seng Heng Gold Futures, said the company could not predict whether gold would break the resistance level at $1,920 per ounce, as the direction of the European economy is still unclear.
Globlex Holding reiterated in its latest research note that as a result of the lower-than-expected Fed funds rate, some money has sought gains from other assets, including gold.