Gold Coins Still Strong in Commodities

Decline - May 16, 2011

By Nicholas Larkin and Pham-Duy Nguyen -
Sales of gold coins are on track for the best month in a year amid the worst
commodities rout since 2008, a sign that bullion’s longest bull market in nine
decades has further to run, if history is a guide.
The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the
Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last
time sales reached that level, bullion rose 21 percent in the next year. Gold
will advance 17 percent to a record $1,750 an ounce by Dec. 31 and keep
gaining in 2012, the median estimate in a Bloomberg survey of 31 analysts,
traders and investors shows.
Investors in exchange-traded products backed by the metal accumulated $98
billion of gold as prices rose 74 percent since U.S. borrowing costs fell to near
zero in December 2008 and the Dollar Index dropped 6.2 percent. With the
gauge, a measure against six currencies, forecast to weaken through 2012
and the Federal Reserve expected to keep rates on hold through the fourth
quarter, the rally may not reverse any time soon.
“There is no sign that gold has peaked,” said Martin Murenbeeld, the chief
economist at Toronto-based DundeeWealth Inc., which manages about $85
billion in mutual funds and brokerage accounts. “We’re going to find that the
U.S. economy is not very strong,” he said. “A low interest-rate environment
will remain for possibly all of 2012. The dollar goes down.”

Gold Rally
Bullion rose almost sixfold from a two-decade low in 1999 while the Dollar
Index fell 35 percent since the end of 2001. The gauge will drop 2.9 percent
more this year and another 3.7 percent in 2012, the median of analysts’
estimates compiled by Bloomberg shows. The two have an inverse
correlation of 0.78, with a figure of -1 meaning they move in opposite
directions all the time, making gold a hedge against a weaker dollar.
Gold rallied every year since 2001, attracting billionaire investors George
Soros and John Paulson, and reached a record $1,577.57 in London on May 2.
The metal rose 0.1 percent to $1,496.57 today.
The S&P GSCI Total Return Index of commodities rose 25 percent since the
start of 2001, the S&P 500 Index made about 25 percent with reinvested
dividends and Treasuries returned 72 percent, a Bank of America Merrill
Lynch index shows.
While the 2,041 metric tons accumulated through metal- backed ETPs helped
drive prices higher, it also represents a threat. Holdings dropped 3.3 percent
in the first quarter, according to data released by the ETP providers. The
details of which investors changed their holdings in that period are being
revealed in Securities and Exchange Commission filings.

Fund Holdings
Touradji Capital Management LP, founded by Paul Touradji, sold 173,000
shares in the SPDR Gold Trust during the quarter, valued at about $24 million
as of March 31, an SEC filing May 13 showed. Astenbeck Capital
Management LLC, run by Andrew Hall, bought a stake in the Market Vectors
Gold Miners ETF valued at $32.5 million on March 31, a separate filing shows.
Soros Fund Management LLC held 4.72 million SPDR Gold Trust shares as of
Dec. 31, equal to about 14 tons, an SEC filing Feb. 14 showed. Soros
described gold in January last year as “the ultimate asset bubble.” The fund
sold some holdings because it no longer expects deflation, the Wall Street
Journal said May 4. Michael Vachon, a spokesman for Soros, declined to
comment.
John Paulson’s Paulson & Co., based in New York, held 31.5 million shares in
the SPDR Gold Trust on Dec. 31, making it the single biggest investor, an SEC
filing in February showed.
The new filings from funds “may show that big names exited ETPs and this
news may cause prices to slip in the very short term,” said Bayram Dincer,
an analyst at LGT Capital Management in Pfaeffikon, Switzerland. Some
funds switched to holding gold directly so they wouldn’t have to announce it
publicly, he said.

Sales Climb
It’s not just the U.S. Mint that saw accelerating sales. Rand Refinery Ltd.,
which makes the Krugerrand, said May 13 that sales are heading for their
best month since August. Demand for physical gold on May 6 was the
strongest since early February, Standard Bank said in a report May 11. The
U.S. Mint sold 62,000 ounces of American Eagles in the first week of May, as
the S&P GSCI slumped 11 percent, the most since December 2008.
Those sales are “certainly reflective of a strong wave of demand for physical
metal,” said Ross Norman, chief executive officer of Sharps Pixley Ltd., a
London-based bullion brokerage. “What drives people towards physical
metal, as opposed to ETF or futures, is fundamental insecurity. It’s like safe
haven in extremis.”
UBS AG, Switzerland’s biggest bank, had its second-best day this year for
physical sales on May 9, according to a report the following day. The bank’s
sales to India, the world’s top bullion consumer, are more than 10 percent
higher than in 2010.

‘Facing Challenges’
“There are more factors than at perhaps any other time in history that would
suggest to investors they should own gold,” said Michael Haynes, chief
executive officer of American Precious Metals Exchange, an online bullion
dealer that had its three best sales weeks ever in April and May. “We don’t
know if the euro is going to crack or stay and the dollar is facing challenges
as the world’s reserve currency.”
Haynes, based in Oklahoma City, expects to ship as many as 15 million
precious metals coins or bars this year, double last year’s figure. The
University of Texas Investment Management Co., the second-largest U.S.
academic endowment, said April 14 it took delivery of about $1 billion of gold
bars.
Another warning sign for the rally may be central banks adding to their
reserves for the first time in a generation. Mexico, Russia and Thailand
bought about a combined $6 billion in February and March, International
Monetary Fund data show. Central banks hold 30,575 tons, equal to about 18
percent of all the metal ever mined, the data show.

Boosting Holdings
The banks were also boosting holdings in 1980 when gold rose to a then-
record $850, only to fall for most of the next 20 years. That high is equal to
$2,299 in inflation-adjusted terms, according to a calculator on the website
of the Federal Reserve Bank of Minneapolis. Prices tripled from 1999 through
the beginning of 2008 as the banks sold more than 4,000 tons.
“Central banks don’t have the best track record trading gold,” said Malcolm
Freeman, managing director of Ambrian Commodities Ltd. in London. He
pointed to the U.K., which sold about 400 tons over about a two-year period
ending in 2002, getting no more than $296.50 an ounce.
Rising interest rates could also diminish the appeal of gold, which generally
earns investors returns only through price gains. At least two dozen nations
and the European Central Bank raised rates this year, data compiled by
Bloomberg show. The Fed will probably hold its benchmark rate in a range of
zero to 0.25 percent through the fourth quarter, according to the median
forecast of 72 economists surveyed by Bloomberg.

Reduced Stimulus
Reduced stimulus may also strengthen the dollar. Fed Chairman Ben S.
Bernanke signaled April 27 the bank will keep record monetary stimulus
when its $600 billion bond purchase program ends in June, the second round
of so-called quantitative easing. The Dollar Index rose 3 percent since then.
“If we get a rise in the dollar because the Fed is exiting QE2 in June, gold
could hit $1,200,” said Michael Pento, a senior economist at Euro Pacific
Capital Inc. in New York who has correctly predicted the high in gold for the
past two years. “It would be a buying opportunity.”
The Dollar Index fell to a two-year low of 72.7 on May 4 and was at 75.71 on
May 13. It will drop to 73.57 at the end of this year and 70.81 at the end of
2012, according to data compiled by Bloomberg from analysts’ forecasts.

Investment Demand
Investment overtook jewelry as the biggest source of demand for the first
time in three decades in 2009, according to GFMS Ltd., a London-based
research company. Investor demand will climb 9.9 percent to 1,597 tons this
year and another 11 percent in 2012, Morgan Stanley estimates. Of the 31
people surveyed by Bloomberg, 25 expect the bull market to continue next
year.
The 3.5 percent decline in combined ETP holdings from a record 2,115 tons
in December may be no bar to higher prices. When assets fell 3.7 percent in
2009, gold rose about 30 percent in the following 3 1/2 months.
“Near term, we like gold and we like agriculture,” Jeffrey Currie, the London-
based head of commodity research at Goldman Sachs Group Inc., told
Maryam Nemazee on Bloomberg Television’s “Last Word” May 13. The team
correctly predicted this month’s slump in commodities, telling investors April
11 to end a recommended trade in oil, copper, cotton, platinum and
soybeans that returned 25 percent in about four months.
“Gold is simply pricing sovereign default risk, it still remains a big issue,”
Currie said. “There’s a lot of concern over the end of QE and noise of QE3, so
that kind of risk will continue to support gold prices. We see them trading up
to the high $1,600s at the end of this year and going into the mid-$1,700s
next year.”
To contact the reporters on this story: Nicholas Larkin at
nlarkin1@bloomberg.net; Pham-Duy Nguyen in Seattle at
pnguyen@bloomberg.net
To contact the editors responsible for this story: Steve Stroth at
sstroth@bloomberg.net; Claudia Carpenter at ccarpenter2@bloomberg.net.
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.

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