Gold Traders Divided Amid Worst ETP Rout Since ’04

Thursday, 09 May 2013 07:25 PM

Gold traders are divided on whether surging demand for jewelry and bullion coins will sustain the rally in prices as a slump in holdings through exchange-traded products extends to the longest in more than eight years.

Twelve analysts surveyed by Bloomberg expect prices to rise next week, with 10 bearish and five neutral. While rising coin sales and demand for physical gold in Asia drove prices up 11 percent since reaching a two-year low April 16, ETP investors sold about $9.9 billion of their metal in the 27 days through May 8, the longest retreat since September 2004.

Gold slid into a bear market in April even as central banks printed money on an unprecedented scale, Europe’s debt crisis spread and the International Monetary Fund cut to its 2013 economic growth forecast. A majority of the 38 analysts surveyed by Bloomberg last month predicted the 12-year bull run is over and billionaire investor Warren Buffett said last week that gold has no appeal even after the rout.

"There's been a lot of physical buying out of China and India and lots of selling still from institutional investors and that's where your tug of war is," said David Wilson, a metals analyst at Citigroup Inc. in London. "Retail buying is not surprising; it's in reaction to lower prices. We're seeing a lot of investors betting on a continued recovery in the U.S. A lot of liquidation of gold positions we've been seeing from the institutional side has been flowing into equity markets."

Gold Prices

The metal fell 13 percent to $1,465.42 an ounce in London this year. Prices reached $1,321.95 on April 16, two sessions after sliding into a bear market, and are 24 percent below the September 2011 record. The Standard & Poor's GSCI gauge of 24 commodities dropped 2.4 percent this year and the MSCI All-Country World Index of equities gained 10 percent. Treasuries returned 0.4 percent, a Bank of America Corp. index shows.

Faith in the metal as a store of value has waned as inflation fails to accelerate and confidence mounts that the U.S. economy is improving. The S&P 500 Index of U.S. stocks set a record and Europe's benchmark Stoxx Europe 600 Index rose to its highest level since June 2008 this week.

Gold will close the year at $1,550, 7.5 percent less than at the end of 2012 and the biggest drop since 1997, the median of 38 estimates compiled by Bloomberg show. Goldman Sachs Group Inc. said April 23 bullion may slide to $1,390 in 12 months, and Deutsche Bank AG predicts a drop to as low as $1,050. Societe Generale SA, Barclays Plc, Credit Suisse Group AG and Morgan Stanley are also among those forecasting lower prices.

Billionaires Index

"It just sits there, and you hope somebody pays you more for it," Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., told reporters in Omaha, Nebraska, on May 2. The investor ranks as the world's third-richest person in the Bloomberg Billionaires Index.

While hedge funds and other speculators increased their wagers on price gains by 19 percent in the week to April 30, the 54,762 futures and options held is down 72 percent since October, U.S. Commodity Futures Trading data show. Investors sold 393.3 metric tons from gold-backed ETPs since holdings reached a record 2,632.5 on Dec. 20, data compiled by Bloomberg show. Mine output was 2,641 tons in 2012, according to Barclays.

Paulson & Co., the hedge fund company founded by John Paulson, lost 27 percent in its Gold Fund last month after the metal and related securities plunged, according to two people familiar with the matter. Paulson is the biggest investor in the SPDR Gold Trust, the largest gold ETP.

Central Banks

Continued central-bank stimulus from the U.S. to Japan to Europe will support gold, with prices rebounding to $1,700 by the end of this year, JPMorgan Cazenove analyst Allan Cooke said in a May 8 report. Prices as much as doubled since the Federal Reserve cut interest rates to a record low in December 2008. The European Central Bank cut borrowing costs to a record low May 2.

"Long-term fundamentals still favor gold," said Adrian Day, who manages about $141 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland. "We would stand aside for now, but be ready to buy when the selling seems exhausted."

There are already signs of stronger demand from some investors, with the U.S. Mint saying April 23 it had run out of its smallest gold coins. Sales of American Eagle coins in April rose to the highest since December 2009 and Australia's Perth Mint said its volumes jumped to a five-year high.

Indian Imports

The price slump boosted Indian imports to more than 100 tons in April, and shipments probably will top 100 tons again this month, said Rajesh Khosla, managing director of refiner MMTC-PAMP India Pvt. The country's gold imports were 860 tons last year, the London-based World Gold Council estimates.

Consumption in China, the second-biggest buyer, jumped 26 percent in the first quarter from a year earlier, the China Gold Association said May 7. Imports by China from Hong Kong more than doubled to an all-time high in March.

Central banks including those of Russia and Kazakhstan are among those still adding to gold reserves. Nations bought 534.6 tons last year, the most since 1964, and are on pace to exceed that this year, according to the World Gold Council.

In other commodities, 12 of 13 people surveyed expect raw sugar to drop next week and one predicted a gain. The commodity slid 10 percent to 17.48 cents a pound on ICE Futures U.S. in New York this year.

Fifteen of 24 surveyed anticipate lower corn prices next week and seven said the grain will rise, while 12 said soybeans will fall and seven expect higher prices. Twelve traders predicted lower wheat and seven were bullish. Corn slid 8 percent to $6.425 a bushel this year in Chicago as soybeans were little changed at $14.0875 a bushel. Wheat is down 7.1 percent at $7.225 a bushel.

Copper Survey

Seven traders and analysts surveyed expect copper to rise next week, four were bearish and eight were neutral. The metal for delivery in three months, the London Metal Exchange's benchmark contract, slipped 7.6 percent to $7,330 a ton since the start of January.

Net-bullish wagers across 18 U.S.-traded raw materials jumped 28 percent to 550,182 contracts in the week to April 30, the biggest increase in seven weeks, CFTC data show. The S&P GSCI gauge of commodities climbed 5.8 percent since reaching a nine-month low April 18.

"The recent improvement in price isn't really a great surprise given the scale of declines that preceded it," said Ross Strachan, a commodities economist at Capital Economics Ltd. in London. "Looking at taking yet further stimulus measures shows how bleak it is. The big picture view is very much that commodities still have substantial room to fall."

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Thursday, 09 May 2013 07:25 PM
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