Gold Bulls Strengthen on Outlook for Additional Stimulus

Gold traders are the most bullish in five weeks as speculation grows that central banks will have to do more to bolster economic growth. Fifteen of 30 analysts surveyed said they expect prices to rise next week, eight were bearish and seven were neutral, making the proportion of bulls highest since July 6.

By Nicholas Larkin
August 10, 2012
Business Week

Gold traders are the most bullish in five weeks as investors expanded their bullion holdings near a record on mounting speculation that central banks will have to do more to bolster economic growth.

Fifteen of 30 analysts surveyed by Bloomberg said they expect prices to rise next week and eight were bearish. A further seven were neutral, making the proportion of bulls the highest since July 6. Investors bought about $850 million of gold through exchange-traded products this month, taking the total of 2,411.7 metric tons yesterday to within 0.1 percent of the all-time high set July 5, data compiled by Bloomberg show.

China’s industrial-production growth weakened in July and U.S. and European manufacturing contracted. The Federal Reserve pledged to do more if needed on Aug. 1 and the European Central Bank promised last month to do “whatever it takes” to preserve the euro. Lower interest rates increase the allure of gold, which generally earns investors returns only through price gains. Bullion rose 70 percent as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing through June 2011.

“More stimulus or money printing is almost certain given the levels of debt out there which is slowing down economic growth,” said Mark O’Byrne, the executive director of Dublin- based GoldCore Ltd., a brokerage that sells and stores everything from quarter-ounce British Sovereigns to 400-ounce bars. “That should be supportive of gold prices.”

Gold’s Rally

Gold rose 2.9 percent to $1,612.60 an ounce on the Comex in New York this year, extending 11 consecutive annual gains. That compares with a 2 percent gain in the Standard & Poor’s GSCI gauge of 24 commodities and a 7.6 percent advance in the MSCI All-Country World Index of equities. Treasuries returned 1.9 percent, a Bank of America Corp. index shows.

The 16.3 tons purchased through ETPs this month increased the value of total holdings to about $125.4 billion. Investors bought 55 tons since the start of January. Buying should reach 250 tons this year and 150 tons in 2013, Barclays Plc predicts.

U.S. manufacturing unexpectedly contracted in July for a second month, the Institute for Supply Management’s factory index showed Aug. 1. The Fed has held interest rates at a record low since 2008. Boston Fed President Eric Rosengren said in an Aug. 7 interview with CNBC that the central bank should pursue an “open-ended” easing program of “substantial magnitude.”

Growth Forecast

The International Monetary Fund cut its 2013 global growth forecast to 3.9 percent on July 16, from an April projection of 4.1 percent, citing Europe’s debt crisis. The euro-area’s economy will contract 0.3 percent this year, from a previous estimate of 0.2 percent, according to an ECB economist survey published in the central bank’s monthly bulletin yesterday.

Some investors have favored the dollar and government bonds as a store of value instead of gold. The U.S. Dollar Index, a measure against six major trading partners, reached a two-year high July 24. The 30-week correlation coefficient between the dollar and bullion is at -0.61, from -0.24 in September, with a figure of -1 meaning the two move inversely. Germany, the U.K. and France sold debt at the lowest yields ever in July.

Hedge funds cut bets on higher prices by 51 percent in the past five months, U.S. Commodity Futures Trading Commission data show. While the net-long position rose 35 percent in the week ended July 31, it is still near the lowest since 2008. Volumes traded on the Comex slipped to a 17-month low in July, bourse data show. Open interest, or contracts outstanding, tumbled 26 percent since September, when gold reached a record $1,923.70.

Coin Demand

Demand for gold coins is weakening, with sales of American Eagles by the U.S. Mint dropping 49 percent to 30,500 ounces last month, the lowest since April. The mint sold 4,000 ounces so far in August, data on its website show.

While gold is still trading 16 percent below the September record, it has averaged about $1,643 this year. Should that be sustained through the end of December, it would be the most ever. Goldman Sachs Group Inc. is predicting a price of $1,785 in three months.

In other commodities, 12 of 33 traders and analysts surveyed by Bloomberg expect copper to rise next week and the same amount predicted a drop. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, fell 1.7 percent to $7,468.50 a ton this year.

Seven of 13 people surveyed said raw sugar will climb next week and six predicted declines. The commodity slipped 9.5 percent to 21.09 cents a pound since the start of January on ICE Futures U.S. in New York.

World food prices surged the most since 2009 in July as droughts damaged crops from the U.S. to Russia, according to a United Nations’ Food & Agriculture Organization index. (MXWD) Drought covers almost 63 percent of the contiguous U.S., which suffered the hottest month on record in July, the National Oceanic and Atmospheric Administration said Aug. 8.

Seventeen of 31 people surveyed anticipate higher corn prices next week and eight were neutral, while 15 of 32 said soybeans will increase and eight predicted little change. Corn jumped 28 percent to $8.2825 a bushel in Chicago this year and reached a record $8.3075 today. Soybeans set an all-time high July 23 and are up 35 percent this year at $16.305 a bushel.

“More quantitative easing will be certainly beneficial to commodities,” said Colin O’Shea, the head of commodities at Hermes Investment Management Ltd. in London, which manages about $2 billion of raw-material assets. “Do you need more QE to drive the market higher? Probably not. The demand side of the equation has been pretty robust.”

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