Gold May Top $400/Oz as Dollar Slumps - Bloomberg

May 28, 2003

May 28 (Bloomberg) -- Gold may climb above $400 an ounce for the first time in seven years as investors seek better returns than they expect from stocks and bonds and a falling U.S. dollar makes the metal appear cheaper for overseas buyers.

"We are at the early stages of another bull market for gold," said Jean-Marie Eveillard, whose $215 million First Eagle Gold Fund more than doubled in value last year as gold prices jumped 25 percent, the largest gain since the 1970s.

Gold futures traded in New York have risen 13 percent from a four-month low reached in April, to $363.50 an ounce at 9:13 a.m. London time. The dollar yesterday touched a record low against the euro and has fallen 22 percent in the past year. The U.S. currency's slide prompted billionaire George Soros and other speculators to buy gold.

Some investors are choosing gold over U.S. Treasuries. Bond yields are near a 45-year low and Europeans have lost money on Treasuries as the dollar fell. The Federal Reserve raised the prospect of a sustained drop in consumer prices, after failed attempts to accelerate U.S. economic growth. That may signal stocks will slump again after a three-year slide, investors said. "The economy is a mess," said Joseph Foster, who manages the $200 million Van Eck International Gold Fund. "We are under deflationary pressure. The Fed cut interest rates, and that's done nothing to revive the economy."

Gold futures touched a six-year high of $390.80 an ounce in February, rising on speculation that war in Iraq would disrupt financial markets and boost demand for the metal as a haven. Prices went as low as $319.80 an ounce last month, after U.S.-led forces ousted Iraqi leader Saddam Hussein.

Gold Follows Currency

Since the recent low reached on April 8, gold has moved almost in lockstep with the euro's performance against the dollar. Over that period, gold and the euro have had a correlation coefficient of 0.96, just below the maximum of 1. In the first quarter, gold was tied to announcements about the war, with its correlation running at about 0.29 to the dollar.

"I had expected gold to weaken after the Iraq war," said UBS Warburg analyst John Reade in London. "I have not expected it to increase as fast as it has because I didn't expect the dollar to weaken that fast."

As of May 20, hedge funds and other large speculators held a net 65,741 gold-futures contracts, the most since Feb. 4, according to the U.S. Commodity Futures Trading Commission. Such "net-long" holdings reached a seven-year high of 66,814 as of Feb. 4, the day before gold rose to a six-year high.

Soros, chairman of Soros Fund Management LLC, the world's biggest hedge-fund group, last week told CNBC that he has sold the dollar and bought gold.

Lack of Alternatives

Soros and other investors have been left with few alternatives to gold.

The Standard & Poor's 500 Index has risen 8.1 percent in 2003 after a three-year, 40 percent slide. The index last week had its biggest drop since March, falling on concern that growth in corporate earnings may falter.

The U.S. economy grew at a 1.6 percent annual pace in the first quarter, and the nation's unemployment rate rose to 6 percent in April, matching an eight-year high.

The yield on 10-year U.S. Treasuries fell Thursday to 3.32 percent, the lowest since 1958.

"Stocks had been a poor investment for the last three years, and bond yields are very low," said John Hathaway, whose $300 million in gold funds attracted $30 million in new investments this year. What you are having is reallocation from paper assets to tangible assets, which gold is obviously the lead."

Hathaway said he expects gold to rise above $400 an ounce this year.

Deflation Threat

U.S. consumer prices last month fell for the first time since 2001. The report fanned concern that the nation's economy would suffer deflation, a sustained drop in consumer prices, dimming prospects for stocks and the dollar.

Federal Reserve Chairman Alan Greenspan on Wednesday said central bank officials "recognize that deflation is a possibility." He said deflation isn't an "imminent danger."

Investors who watch historical charts to forecast changes in prices also have contributed to increased demand for gold. Futures prices broke above the 100-day moving average on May 8. The last time that happened was in late October, before a 3 1/2-month rally in which prices jumped by about a fifth.

"In the last 2 weeks, the charts have become more important," said Michael Guido, associate director for hedge-fund marketing at Barclays Capital Inc. in New York. When prices break from moving averages, "you drag in the trend followers and commodity-trading advisers, which are technically oriented."

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