The private bank is looking at the case for replenishing its gold holdings amid an uncertain economic outlook, and is concerned about the medium-term prospects for China.

Swiss private bank Pictet has contemplated stocking up on physical gold as a way to insure client portfolios against adverse market moves and heightened volatility, its asset allocation head said recently, while warning that a financial crisis in China is likely at some point in the next few years. 

This sobering assessment was outlined to journalists in London by Christophe Donay, equity partner and head of asset allocation at the Geneva-headquartered bank. To diversify assets in markets where many areas are highly correlated, Donay said, the bank has reintroduced holdings of US Treasuries into client portfolios; held illiquid assets such as real estate, and is looking at gold.

In the case of the yellow metal, Pictet cut its holdings in 2012 (gold hit a record of more than $1,920 per ounce in September 2011) and will need a number of “triggers” to increase its stakes, Donay said.

These "triggers" include a notable rise in inflation (gold typically outperforms as an asset when inflation is 5 per cent or over), a further financial crisis in a systemically important nation such as China, and negative real interest rates.

The bank has argued that the US should achieve real GDP growth (allowing for inflation) of 2.0 per cent in 2016, while the eurozone will see growth of 1.8 per cent. It doesn’t predict a take-off in Japanese economic growth this year. Among other predictions, Pictet expects the UK will elect on 23 June to stay in the European Union, but the risk of a “Brexit” is high, it said. A UK exit will weigh on sterling and the euro for some time.

Pictet is currently positioning for what Donay described as a “lacklustre” economic environment with a lack of positive momentum. The bank reduced its overweighting of equities in November, then increased this overweight in February – to exploit a market rebound – and is now overweight equities in its balanced portfolios, he continued. In such an environment of greater volatility, the bank has to be more tactically nimble around shifts to its asset allocation than in earlier periods, he said.

“We are looking for the next turning point to play the correction [in equities],” he said. Such a turning point could come from problems in China or disappointing earnings results.

Donay was forthright about China: “China is a big concern on a daily basis.”

The bank expects relatively robust economic growth (6.5 – 7.0 per cent) in 2016. However, further out, the worries about a sharp change grow, he said. China faces the issue of where credit growth is outpacing growth of the overall economy, with investment above 25 per cent of GDP. Historical evidence and analysis suggests that where this ratio of investment to GDP persists, there will eventually be a sharp correction, he said.

“We stay away from emerging assets in our strategic asset allocation,” Donay said.  

The levers and buttons aren’t working like they used to
Donay ruminated on the idea that central bank monetary policy - such as the wave of quantitative easing, aka money printing, that has been used by major central banks such as the Bank of Japan, Federal Reserve and European Central Bank - isn’t having the stimulative impact that may have been expected. A reason why the transmission mechanism of central banks is broken is because of changes to the structure of the world economy, he said. These changes, such as in technology, are deflationary without adding to output. Innovations in alternative energy, transportation (Uber, etc), biotechnology, 3-D printing and smart materials were making goods and services cheaper, Donay said, but did not add new forms of wealth.

While there have been a number of “innovation shocks” affecting the world in recent years, such as from computers, containerisation and the impact of China/Eastern Europe entering the capitalist order, there hasn’t as yet been a “cognitive shock” among policymakers to match the kind of radical changes enacted in the early 1980s, for example, when US Federal Reserve chairman Paul Volcker pushed up interest rates to double digits in a bid to kill inflation.