Hou Wey Fook: «There is De-Dollarization Fear»
Historically, gold has risen as the dollar weakened but as of late, the yellow metal has climbed regardless of the greenback’s movement. According to DBS’ Hou Wey Foo, this is driven by demand from central banks.
Year-to-date, gold prices are up almost 30 percent at more than $3,300 per ounce while doubling in the last three years. Although some may attribute this to the worst start of the year for the dollar since 1973 – an approximately 9 percent decrease thus far – the longer-term trend may suggest otherwise.
According to DBS chief investment officer Hou Wey Fook, gold prices have traditionally held an inverse relationship with US dollar strength and interest rates.
«But in the last two years since 2022, that correlation had broken down,» Hou said at a media briefing attended by finews.asia. «So even though the dollar has been strong and interest rates have been elevated […] the price of gold has gone up and gone up tremendously.»
Asymmetric Risk-Reward
Hou believes the cause for the breakdown in this correlation is driven by record purchases from central banks. As their investor profile tends to be less sensitive to prices, they are willing to buy strategically irrespective of the levels. As a result, any dip is an extra motivator to add gold holdings and this leads to an asymmetric risk-reward investment opportunity.
«If gold prices come down, you will find support from all the central bankers. But at the same time, if dollar and interest go down, the gold price can still go up,» Hou explained.
Reserve Currency Status in Doubt
The reason for strong gold demand by central banks, according to Hou, is due to concerns about the state of the US dollar.
«There is de-dollarization fear. The fear that, in fact, the US dollar may lose its reserve currency status,» he noted. «The gold buying will sustain. The allocation of gold in central banks’ portfolio is still below historical average, so I think there’s still more room.»
DBS has set a target price for gold at $3,765 per ounce by the fourth quarter of 2025.
Still Bullish on AI
While the bank is cautious on the dollar, it remains bullish on certain US assets, most notably those involved in artificial intelligence.
«So the way to look at it is, you are actually buying the best of class global companies that happen to be listed on NASDAQ,» Hou said.
Overall, the bank maintains a slight underweight on US equities. Elsewhere, it is overweight on Europe and Asia ex-Japan on resurgent fiscal impulse, favourable dividend yield and valuation discount. Within bonds, it advises investors to maintain a barbell duration strategy, overweighting 2 to 3-year and 7 to 10-year segments. It also has a preference for US Treasury Inflation-Protected Securities (TIPS), capital securities and short-duration quality credit.