The Swiss asset manager upgraded gold to overweight from neutral earlier this month, and expects the gold price to climb above $1,800 (£1,352, €1,628) in five years, compared to the current level at around $1,300.
Paolini explained the timing of the upgrade was due more to gold price momentum after a long period of underperformance that resulted from the strong US dollar and the end of quantitative easing in the US.
“The Federal Reserve will be very cautious in raising interest rates in the future. And the US economy growth [is slowing], so there’s no reason for the US dollar to be so expensive,” Paolini said.
Short-term political risks, including Brexit, Spanish election results and the US presidential election in November, coupled with the negative interest rate environment already seen in Europe and Japan, leads to “almost no yield in government bonds”, which supports rising demand for gold investments, he added.
"Gold is generally not a good investment. But in this specific environment, which could last for several years, I think gold is among the few asset classes to offer good returns"
Paolini suggested one should have about 3-5% of gold assets in the portfolio. “In the next five years, it’s even more positive for gold as the same factors will show up again. We expect the US dollar to depreciate by 10-20% in trade-weighted terms in five years. The political risks are also unlikely to go away.
“Gold is generally not a good investment. But in this specific environment, which could last for several years, I think gold is among the few asset classes to offer good returns,” he said.
Paolini said diversification should be made within the gold space, such as physical gold, ETFs and gold mining stocks. The latter could capture the rise of equities, while also being less correlated with equities of other sectors.
The largest gold ETF, SPDR Gold Trust, is up 4.3% since Brexit, recording $1.1bn worth of inflows over the last week, according to ETF.com. Year-to-date the ETF has surged 23.5% with $11.5bn of inflows.
Liechtenstein-based investment boutique Incrementum AG is even more optimistic. It forecasts the gold price to surge to $2,300 in two years, according to a report released yesterday.
“It used to be said that gold doesn’t pay interest, now it can be said that it doesn’t cost interest,” Incrementum AG noted in the report.
However, Bank of Singapore expected the gold price to remain choppy this year and did not turn significantly bullish.
Read more about gold investing in International Adviser’s monthly magazine.
Gold has underperfomred the S&P 500 over three years, but it is seeing increasing investor interest.