UBS: Gold seen as hedge vs peso weakness, inflation

MANILA, Philippines — Gold could become a more important hedge for the Philippines against peso weakness, inflation risks and wider economic uncertainties as elevated oil prices threaten oil-importing economies in Asia, according to UBS Investment Bank.

UBS precious metals strategist Joni Teves said persistently high crude prices could weigh on currencies in the region and support demand for gold as an alternative asset.

“With the higher oil prices, Asia — especially the oil-importing countries in Asia — is at bigger risk if prices continue to rally and remain elevated. This creates a lot of weakness to currencies,” she said.

The assessment is relevant for the Philippines, which imports most of its oil requirements and is already facing faster inflation, slower growth and renewed pressure on the peso amid the Middle East conflict.

Inflation accelerated to 7.2 percent in April from 4.1 percent in March, bringing the four-month average to 3.9 percent. Economic growth also slowed sharply to 2.8 percent in the first quarter, well below the government’s target of at least five percent for the year.

Teves said the continued conflict in the Middle East and higher energy prices have increased upside risks to UBS’ gold outlook.

Costlier oil can push inflation higher while dragging on growth, a combination that tends to make gold more attractive to investors.

“If we are in a scenario where growth actually gets dragged lower and the Fed is more dovish than the market currently expects, that could extend gold’s bull cycle over the next couple of years,” Teves said.

A more dovish US Federal Reserve means lower or less restrictive interest rates.

Teves said that if inflation stays high while interest rates remain steady or fall, inflation-adjusted returns decline, making gold more appealing even though it does not pay interest.

She added that fears of currency weakness have already helped lift gold investment demand in Asia, where buyers tend to favor physical holdings.

However, Teves said demand could soften if economic stress becomes severe enough to force retail investors to sell gold for cash, as seen during the global financial crisis.

“Gold is so far being viewed as sort of an alternative asset that could help protect against currency weakness and all the macroeconomic uncertainty,” she said.

Teves said the Philippines also stands out in the region because the Bangko Sentral ng Pilipinas (BSP) has long been active in managing its gold holdings, supported partly by domestic supply from small-scale and artisanal miners.

“The central bank of the Philippines is quite unique because they have historically been active in the gold market,” she said. “Especially in the region, they are one of the ones that have always been actively managing their gold reserves.”

BSP data showed the country’s gross international reserves stood at $104.13 billion as of end-April, of which gold holdings accounted for $19.78 billion, or about 19 percent of the total. The buffer is enough to cover 6.9 months’ worth of imports of goods and payments of services and primary income.

Teves said the BSP’s gold position has helped keep the Philippines diversified even before the recent global rush into the precious metal.

“As far as diversification of the BSP’s reserves, they’ve always been diversified because they’ve always had an allocation to gold,” she said.

UBS also expects central bank demand to remain supportive of gold prices.

Teves said there is a “very high bar” for outright selling, even if some monetary authorities need liquidity amid higher energy costs.

She said central banks tend to take a long-term view and may continue accumulating gold until they reach a reserve mix that meets their diversification objectives.

UBS has maintained its year-end gold price target of $5,600 per ounce. It also expects silver to rise above $100 per ounce, although Teves said silver could lag gold if weaker global growth dampens industrial demand.