Investors make swift grab for gold

Since traders first began to anticipate the US Federal Reserve's move to launch another round of quantitative easing, gold has barely paused for a breath. Since mid August, gold has jumped 12.5% to $1,795 an ounce. Over this time investors have lifted their gold holdings and are most bullish on gold in a year.

By Jack Farchy
October 5, 2012 7:52 pm
Financial Times

Gold is back from the wilderness. There were moments during the summer, as prices lurched down towards $1,500 a troy ounce, when investors began to question whether the decade-long bull market in the precious metal had ended. “Gold was boring for a long time,” says a hedge fund manager.

No longer. Since traders first began to anticipate the US Federal Reserve’s move to launch a fresh programme of “quantitative easing” in mid-August, gold has barely paused for breath. Its price has jumped 12.5 per cent, on Friday touching the highest level in nearly a year of $1,795 a troy ounce. Measured in euros or Swiss francs, gold has this week hit all-time highs.

“The swing is just remarkable in terms of sentiment,” says Philip Klapwijk, head of metals analytics at Thomson Reuters GFMS, a precious metals consultancy.

Indeed, a steady progression of the leading lights of the investment industry has come out in support of gold. The Fed’s move to create a fresh $40bn each month to buy assets with no fixed time limit – nicknamed “QE infinity” – has refocused investors’ attention on fears of competitive devaluation, the debasement of currencies and the possibility of soaring inflation at some point in the future.

Bill Gross of Pimco, the world’s largest bond fund manager, this week warned that if the US failed to put its finances on a sustainable footing “bonds would be burnt to a crisp and stocks would certainly be singed”. He concluded: “Only gold and real assets would thrive.”

“I think gold should be a part of everybody’s portfolio,” said Ray Dalio, founder and chief investment officer of Bridgewater Associates, the world’s largest macro hedge fund manager. “We have a situation now when you have too much debt. Too much debt leads to the printing of money to make it easier to service. All of those things mean that some portion should be in gold.”

Others have been quietly accumulating the metal. George Soros and John Paulson added to their gold holdings in the second quarter, according to regulatory filings, and bankers say that large hedge funds have continued their gold buying spree in recent months.

They are far from alone. Investors have lifted their gold holdings via exchange traded funds by 158 tonnes since the start of August to a record level. Speculators in the US futures market are at their most bullish on gold in a year, according to Commodity Futures Trading Commission data. Even the charts appear to be aligning in gold’s favour. The metal’s 50-day moving average recently rose above its 200-day moving average – a formation known among chartists as a “golden cross” – seen by many as a powerfully bullish signal.

“The gold chart has turned decidedly bullish,” says BlackRock, the US asset manager, noting that the last time this happened was shortly after the Fed’s first quantitative easing programme. If gold’s action in the coming months mirrors its performance then, BlackRock says, prices should hit $2,400 by next summer.

What could possibly go wrong? Some traders are beginning to feel nervous, pointing to weak physical markets. Demand from India and China, the two largest physical markets, remains unspectacular, even if it has bounced back in the past fortnight as the rupee strengthened, making bullion more affordable for price-conscious Indians.

Moreover, the rally appears to have stalled just below $1,800 – a level that has proved a stubborn barrier for several other rallies in the past year.

“There are a number of people disappointed that we haven’t continued to race above $1800,” says Kamal Naqvi, head of commodity investor sales at Credit Suisse. “What there isn’t today is ‘panic’, particularly that inflation will race away or that the dollar will collapse. That has taken some of the short term momentum away.”

Indeed, while investors are bullish about gold, they are not yet super-long. Mr Naqvi estimates that hedge funds’ positioning in gold stands at about 65 per cent of the most bullish level on record. According to BullionVault, a platform for retail precious metals investors, gold buying in September remained well below its record high a year earlier.

“If you go round and talk to all the people who are involved closely in the market, most people are worried about things like Indian demand,” says Jonathan Spall, head of precious metals sales at Barclays. For this reason, most analysts and traders are cautious about forecasting a new dollar record for gold this year, predicting it will be the first half of next year before the $1,920 and $2,000 levels are breached.

Yet, with the US at risk of going over a “fiscal cliff” – unless Congress agrees new tax rates or a long-term budget deal – the prospect of another round of global “currency wars”, and the possibility of further expansion of central bank balance sheets leading to higher inflation expectations, it is difficult to find anyone who is bearish on gold.

“A lot of people outside the market are saying this is too big a story, you’ve just got to be in gold,” says Mr Spall. “One of the things you really could see propel gold is if those people who have been sceptical say, ‘OK I’ve just got to be in this market’.”

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