Gold lethargy mys­te­ri­ous

The Weekend Australian - Travel - - Resources -

GOLD is go­ing nowhere. Dol­lar-priced bul­lion, a tra­di­tional haven for in­vestors in times of tur­moil, is lag­ging be­hind US trea­suries. The metal is stuck at about $673 an ounce in Lon­don, lit­tle changed for the week and up just 1.2 per cent since July 16, when stocks started to tum­ble.

It should be the best of times for in­vestors in the metal. The dol­lar has weak­ened 3.6 per cent against the euro this year. The Fed­eral Re­serve says in­fla­tion re­mains the ‘‘ pre­dom­i­nant risk’’ to the econ­omy. Com­mod­ity prices, as mea­sured by the UBS Bloomberg CMCI in­dex, are head­ing for a sixth straight an­nual gain. The sup­ply of gold is fall­ing for the third time in four years, and global stock in­vestors lost as much as $2.66 tril­lion in the most volatile trad­ing since 2003.

‘‘ It’s a mys­tery,’’ says Peter Schiff, chief ex­ec­u­tive of­fi­cer of Darien, Con­necti­cut-based bro­ker­age Euro Pa­cific Cap­i­tal, with $700 mil­lion in cus­tomer ac­counts. ‘‘ Th­ese are ideal con­di­tions for gold. The fact that gold hasn’t risen means there’s a lot of com­pla­cency out there. Peo­ple aren’t pan­icked yet.’’

Gold an­a­lysts are re­treat­ing. New York-based Cit­i­group, the big­gest US bank, cut its 2007 fore­cast to $679 on av­er­age from $700. John Reade, the an­a­lyst at Zurich-based UBS AG who pre­dicted last year that gold may approach its 1980 record of $850, now fore­casts $670. Gold closed on Au­gust 10 at $672.80, up 5.7 per cent since De­cem­ber 31.

In­vestors’ op­ti­mism is wan­ing be­cause cen­tral banks in Europe have in­creased sales of re­serves this year by 7.3 per cent, or 24.5 more tonnes val­ued at $581 mil­lion, data from the Lon­don­based World Gold Coun­cil show. The world’s cen­tral banks are the big­gest hold­ers of gold, con­trol­ling about a fifth of all known sup­plies.

The Euro­pean banks have sold 358 tonnes of the 500 tonnes per­mit­ted an­nu­ally, com­pared with 333.5 tonnes through Au­gust 11 last year, the coun­cil says. Banco de Es­pana has sold 149 tonnes in the cur­rent year, more than dou­ble the sales in the pre­vi­ous two, says Lon­don-based re­search firm GFMS Ltd.

‘‘ It cer­tainly has been a source of frus­tra­tion for gold in­vestors,’’ Sean Boyd, chief ex­ec­u­tive of­fi­cer of Cana­dian gold pro­ducer Ag­nico-Ea­gle Mines, says. ‘‘ We’ve had some well­timed cen­tral bank sales that kept us away from the magic $700 num­ber ear­lier this year.’’

Hedge-fund man­agers


other large spec­u­la­tors have pared bullish bets. Spec­u­la­tive long po­si­tions, or wa­gers prices will rise, dropped 34 per cent in the week ended July 31, the most in two years, based on hold­ings of New York gold-fu­tures con­tracts tracked by the U.S. Com­mod­ity Fu­tures Trad­ing Com­mis­sion.

Ris­ing global in­ter­est rates have made hold­ing gold less at­trac­tive for for­eign in­vestors. While the Fed has kept rates un­changed at 5.25 per cent since June 2006, the Euro­pean Cen­tral Bank has raised rates twice this year to 4 per cent and the Bank of Eng­land made four in­creases to 5.75 per cent. Gold priced in euros is up 3 per cent this year.

Gold in­vestors say the last time they saw as many rea­sons to buy was in the 1970s, af­ter Iran cut oil sup­plies, US in­fla­tion rose to 12.8 per cent, the Stan­dard & Poor’s 500 In­dex fell to a 12-year low and the econ­omy sank into re­ces­sion. Gold reached its record high of $850 an ounce on Jan­uary 21, 1980.

The top rea­son in­vestors buy gold is to hedge against fall­ing US as­sets, says Martin Muren­beeld, chief econ­o­mist at DundeeWealth Inc. in Toronto. The firm man­ages $27 bil­lion in mu­tual funds.

Gold jumped 23 per cent last year, the sixth straight an­nual gain, as the dol­lar fell 11 per cent against the euro. The dol­lar is down against all 16 of the world’s most-traded cur­ren­cies in the past six months, ac­cord­ing to data com­piled by Bloomberg.

Fall­ing gold sup­plies are an­other mo­tive to buy, says Ag­nico-Ea­gle’s Boyd, who sees prices reach­ing $850 in 18 months. Out­put from mines, re­cy­cled metal and sales by cen­tral banks and spec­u­la­tors fell 2 per cent in the first quar­ter to 808 tonnes from a year ear­lier and de­clined 22 per cent from the first quar­ter of 2005, ac­cord­ing to the World Gold Coun­cil.

Still, in­vestors haven’t turned to gold as an al­ter­na­tive as­set as stocks de­clined the past four weeks.

The S&P 500 has fallen 6.2 per cent since July 16, in­clud­ing a 3 per cent drop on Au­gust 9, as con­cern mounted that losses in US sub-prime mort­gages may hurt eco­nomic growth and earn­ings. Cen­tral banks in the US, Europe, Ja­pan, Aus­tralia and Canada added about $136 bil­lion to the bank­ing sys­tem in an at­tempt to avert a cri­sis of con­fi­dence in global credit mar­kets.

‘‘ All th­ese credit prob­lems and bailouts are in­fla­tion­ary and cre­at­ing dol­lars,’’ Euro Pa­cific Cap­i­tal’s Schiff says. ‘‘ I’m ex­pect­ing an ex­plo­sive move for gold any day now.’’

Yet as stocks fell, the re­turn on 10-year trea­suries since July 16 was 1.5 per cent, out­pac­ing gold, ac­cord­ing to data com­piled by Mer­rill Lynch & Co. The bonds, which carry the high­est debt rat­ing and are backed by the gov­ern­ment, pro­vide a fixed re­turn. Gold doesn’t.

‘‘ In times of a liq­uid­ity crunch, peo­ple want cash, and that’s Trea­suries, not spec­u­la­tive stuff like gold,’’ said Ron Goodis, who has been trad­ing gold since 1978 and is di­rec­tor of fu­tures trad­ing at Equidex Bro­ker­age Group in Closter, New Jer­sey.

In­fla­tion isn’t as much of a ba­sis for buy­ing gold now, says Eu­gen Wein­berg, se­nior com­modi­ties an­a­lyst at Com­merzbank AG in Frank­furt.

‘‘ If we see in­fla­tion rates ris­ing to 5 per cent and be­yond, there will be a case to buy gold, but we are not there yet,’’ Wein­berg said. Bloomberg

Safe haven: Tur­moil in the mar­kets has not yet sent the price of gold in an up­ward spi­ral

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