Gold Coins Show Bull Market Unbowed in Commodities Decline

By Nicholas Larkin and Pham-Duy Nguyen - May 16, 2011

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 Londonon 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 Thailandbought 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.

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