World Is Bitten by the Gold Bug
APRIL 22, 2011
Gold continued its upward march in a time of global financial tumult, closing above $1,500 an ounce Thursday for the first time as investors seek safe haven in the metal.
In a remarkable performance for any sort of asset, gold has notched a record high every day this week—on days when investors were alternately gloomy and optimistic. On Monday, as stocks swooned after Standard & Poor's warned about the credit rating of the U.S., gold reached a new high. It kept rising on Tuesday and again on Wednesday, as stocks soared on impressive corporate earnings.
On Thursday, gold rose $4.90 an ounce to $1,503.20, another nominal record high and its first settlement above $1,500. Gold is up for five straight weeks, and has gained 5.8% so far this year. Gold will not trade in the U.S. on Good Friday.
The reason for gold's ability to do well in any market lies in its recent role as a haven from concerns about the dollar, inflation and shocks in Europe, the Middle East and Japan.
"Gold has more than one hat right now," said Adam Klopfenstein, senior market strategist at Lind-Waldock, a division of MF Global. "What people are seeing around the globe is that there's really nowhere to hide right now. When one camp cools down on buying gold, you are seeing another camp come in."
Gold's rise is a broader reflection of a lack of confidence in governments' abilities to sort out fiscal problems.
Investors are concerned not only about the value of the U.S. dollar, a worry accentuated by S&P's decision to downgrade the U.S. debt outlook. They also are concerned about the outlook for the euro, as the sovereign debt crisis in Europe worsens, and the yen, which faces hurdles as the Japanese economy recovers from its recent earthquake and tsunami.
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Gold is seen as a lasting store of value, which doesn't erode like that of currencies.
"If you have two major currencies looking a little bit wobbly, some investors and speculators put their money into gold," said Barry M. Wainstein, Global Head of Foreign Exchange & Precious Metals at Scotia Capital, a subsidiary of Bank of Nova Scotia.
Some currency traders have sold their positions and bought physical gold recently, he said. As the metal barrels higher, investors of all stripes are jumping in. And buyers are increasingly taking possession of gold, instead of trading futures contracts.
Everyone from university endowments to small individual investors has been buying bars and coins. Operators of storage vaults are scrambling to find more space to shelter the bullion, and are stepping up hiring to deal with the extra work load.
The metal has rallied despite the interest-rate hikes by the European Central Bank and the People's Bank of China in early April. A higher interest rate means a higher return on cash, and typically is negative for gold, which yields nothing. However, gold investors took the rate increases in stride.
Gold has scaled new heights in all currencies. In dollars, gold rose 1.2% this week, in euro terms it rose 0.9%, and in pounds it is up 0.5%.
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Because so many have piled into the gold market so quickly, the risk of a swift reversal becomes ever greater. The gold market, while popular, is relatively small compared to stocks and bonds, making it more sensitive to sentiment swings.
John Hummel, chief investment officer with AIS Futures Management LLC, which oversees $500 million in assets, said he is "extremely bullish on gold." About 80% of AIS's $125 million Tactical Asset Allocation Portfolio is in gold.
His primary argument: Central banks and private investors are increasingly turning to gold as an alternative store of value as paper currencies continue to fall. As of the end of March, central banks around the world held 27,219.8 metric tons of gold, or 11.3% of their total reserve holdings, according to the World Gold Council. The rest is held in the form of reserve currencies such as the U.S. dollar.
"At some point, foreign holders will refuse to accept greater amounts of U.S. debt or the dollar as reserve currency," Mr. Hummel said in a note to investors.
Some people are concerned by the fact that gold is on everyone's buy list.
The greater risk for gold at this stage is not higher interest rates, but growth and stability, said Daniel Brebner, head of metals research for Deutsche Bank in London.
Gold could lose allure if investors conclude that the world has returned to a benign investment environment, where growth is sustainable without extraordinary government support. If that happens, he said, "the reasons for investors moving into gold start to reverse."
Because so many have piled into the market so quickly, the risk of a swift reversal becomes ever greater. The gold market, while popular, is relatively small compared to stocks and bonds, making it more sensitive to sentiment swings.
Demand in India, the largest consumer of gold, is likely to fade once its festival season ends with the arrival of the monsoons in June, said Jeffrey Rhodes, global head of precious metals at INTL Commodities, a commodities broker.
Mr. Rhodes still thinks gold will move higher later this year. And some say gold has much further to rise. GFMS Ltd., a London-based metals consultancy, predicts gold will reach $1,600 an ounce before the end of this year.
The University of Texas Investment Management Company recently converted all its gold futures holdings into physical bullion, worth about $1 billion.
It's a very conservative hedge" against some low-probability scenarios, such as the debasement of a major currency, said Bruce Zimmerman, chief executive officer of the $26.6-billion fund. The Texas fund has 20.7 tons of gold stored in a New York vault.
In 2010, total physical bullion investment soared 66% to 880 metric tons, says GFMS, and the trend looks set to be repeated this year.
"These are long-term holdings," said Adrian Ash, head of research at BullionVault, an online service for private investors to trade precious metals. Physical holdings are farther from the financial markets and less prone to short-term sell-offs.
In Oklahoma City, bullion dealer American Precious Metals Exchange has seen a surge of orders for gold bars and coins. In the past year, the company has doubled its work force and tripled its phone connections, said Michael Haynes, chief executive officer. To warehouse more gold, it had to double its vaulting space located underground in a former Federal Reserve building in downtown Oklahoma City in November.
"All of those people that missed out buying gold...are kind of re-energized and jumping in," said Robert Higgins, chief executive of First State Depository LLC, a Wilmington, Delaware-based storage operator. He has hired three people in the past six weeks and is considering starting a night shift to handle all the inquiries.
—Liam Pleven contributed to this article.Write to Carolyn Cui at carolyn.cui@wsj.com
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