Why Blackstone Is Giving Up On Gold

January 7, 2016

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(Kitco News) – It has been often said that investors like to hold between 5-10% in gold as a way to protect a portfolio; however, one executive of a major private-equity firm is going against this investment thesis and instead, is avoiding the yellow metal entirely in 2016.

In a company webinar Thursday, Blackstone Vice Chairman Byron Wien, known best for the annual release of his “10 Surprises” for the year ahead, said that he would cut his gold holdings completely.

Every year, the market veteran shares his “radical asset allocation” strategy, which included 5% in gold and 0% in cash last year. However, for 2016, Wien seems to have shifted course.

“I am eliminating my long-held 5% gold position because I do not expect much movement in the metal over the next year,” he said, adding that instead he will be “increasing cash from 0% to 5%.”

“I think gold is going to work at some point but I think we’ve got some space between now and when it does,” he added during the webinar.

Meanwhile, Wien said he would increase his exposure to European equities from 5% to 10% and reduce his holdings in global large cap multinationals from 10% to 5% because “I believe their price-earnings ratios reflect the corporate prospects.”

Aside from those changes, Wien said his other allocations will remain the same as in 2015.

Wien’s list included one potential surprise by the Federal Reserve in 2016, which he expects will only hike rates once by 25 basis points this year.

“[The Fed] said they’d do four…I don’t think they’ll do that because the [economic] data won’t support it,” he said.

“A weak economy, poor corporate performance and struggling emerging markets are behind the cautious policy. Reversing course and actually reducing rates is actively considered later in the year,” he added, noting that real U.S. gross domestic product should be below 2% this year.

Although Wien’s seventh surprise sees oil prices “in the $30s” on the back of slower global growth and diminished exploration, he said there is a possibility for commodity prices to stabilize as “agricultural and industrial material manufacturers cut production.”

“The second most crowded trade is everybody thinks oil is going to go up. It will eventually but not this year,” he said. “I think we’re going to see oil stay in the $30s and may have blips up into the $40s, but basically, it’s going to be consolidating at current levels.”

One major factor that has weighed on gold prices has been the stronger U.S. dollar, which has risen to multi-year highs. However, Wien said he expects the greenback to weaken in 2016.

“Right now, being long the dollar is the most crowded trade out there. My belief that the dollar is going to be weak against the euro,” he said, adding that he could see the dollar moving to $1.20 against the European currency.

Other “surprises” that made it to Wien’s list this year included Hillary Clinton for the presidential win, the growing refugee crisis in Europe to prompt EU breakup talks again, as well as low growth in China.

By Sarah Benali of Kitco News; sbenali@kitco.com
Follow me on Twitter @SdBenali