LONDON - Gold is overvalued at its current near-record levels, with underlying supply and demand fundamentals justifying prices closer to $US750-850 an ounce portfolio manager at GE Asset Management Nicholas Koutsoftas said.
He said while the non-fundamental drivers of gold, such as demand for the precious metal as an alternative to the dollar or as an inflation hedge, could have a significant effect on prices, from a supply and demand perspective it is overvalued.
"When I look at gold in a fundamental sense there is nothing to make me say gold shouldn't be trading somewhere between $US750 and $US850 over the next 12 months," Mr Koutsoftas told Reuters.
"Gold is one commodity which I have a hard time trying to derive a proper valuation for, based on its non-fundamental factors -- it is viewed as a hedge against a weak US dollar, or rising inflation," he added.
"We use the marginal cost of supply as a measure to understand a commodity's fair value, and with gold, the marginal cost of supply is significantly lower than the $US1,000 an ounce gold is currently trading above."
Mr Koutsoftas manages a portfolio exclusively for General Electric Co's US pension fund, total plan assets of which were $US40 billion in June of this year. Less than one per cent of the plan's holdings are invested in commodities.
Better support
Mr Koutsoftas said from a fundamental perspective, there were plenty of other commodities, including platinum and copper, which have better underlying support than gold.
"If we look at the sources of demand for gold, we have investment demand, physical demand for coins and bars, jewellery demand -- which makes up 75 per cent of gold demand -- and producer dehedging," he said.
"If you go back over the past eight years or so, that hedgebook has gone from 3,500 metric tonnes to 400 metric tonnes," he said.
"That could potentially go to zero, and that takes away that source of demand for gold."
Jewellery buying has also been weak as prices have risen, and investment demand for products such as exchange-traded funds is unlikely to close the resulting gap in demand, he said.
"I don't think ETF demand is going to grow in any significant way, any more than it already has done," Mr Koutsoftas said.
Spot gold hit a record high of $US1,070.40 an ounce last week, benefiting from fears over currency market stability as the dollar index slid to 14-month lows.
But in terms of a hedge against either inflation or a weakening dollar, investing in a basket of commodities could also prove to be a better bet than gold alone, Mr Koutsoftas said.
"Historically speaking, if you were to look at a basket of commodites versus just gold by itself, you would have a better hedge against the currency, or even rising inflation," he said.
