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Gold Investors Still Underweight

Commodities / Gold and Silver 2010 Mar 05, 2010 - 07:50 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleTHE PRICE OF GOLD in the professional wholesale market held steady in London trade early Friday, dipping to $1130 per ounce as the Dollar bounced but nearing new record-high weekly closes for UK and Euro investors.

World stock-markets ticked higher as government bonds eased back.

US employers shed a net 36,000 workers in Feb. according to the monthly Non-Farm Payrolls report, slightly more than Wall Street analysts forecast.

"[Gold] is building a base to test new highs later this year," says Standard Bank's Walter de Wet.

"The reasons that led many investors to diversify into gold still hold good," says Emmanuel Painchault, manager of the GoldSphere fund for Edmond de Rothschild Asset Management.

''We believe individual savings and financial portfolios [remain] underweight gold, although we do not expect this demand segment to double in 2010 as it did in 2009."

"Excessive government debt is still a cause for worry and investors are wary of currency swings."

In the United States on Thursday, two senior central bankers – speaking separately – said interest rates will remain "very accommodative", staying at 0%, until the Federal Reserve sees "highly sustainable" growth.

Here in London, where the Bank of England has now paused its money-creation program, the Capital Economics consultancy said "the UK economy would have been even 2-3% weaker without quantitative easing" in 2009.

Standing at £200 billion, the BoE's asset-purchase scheme is equal to some 14% of total economic output.

Chinese premier Wen Jiabao meantime noted "latent risks" in the country's banking sector, but told the 2010 National People's Congress in Beijing to target 8% growth in GDP.

"A low cost of financing for a high-cost business is a positive," notes Bob Lyon, portfolio manager at Smith & Williamson's Global Gold & Resources fund. "[But] debt for junior and mid-cap gold miners is hard to come by."

Higher real interest rates would dent gold investment demand, says Lyon, since better returns to cash – over and above growth in the cost of living, as opposed to below it as is the case across Europe and the United States right now – would cut gold's appeal as an inflation hedge.

In the gold mining sector, Australia's Bureau of Agricultural and Resource Economics this week forecast that gold output from the world's No.2 producer nation will rise 11% this year to 242 tonnes.

2010-2011 will bring a further 10.5% increase, says ABARE, with Newmont's giant Boddington mine leading the increase.

"These figures reinforce our long-standing view that gold output will continue to increase substantially over the next few years," says the latest Commodities Weekly from French investment bank Natixis.

"Since 2004, investment in new mine capacity has increased in lock-step with the rise in the price of gold."

In its new review of 2009, however, the government-funded Geoscience Australia says domestic gold mining exploration spending fell more than 26% last year from the 2008 record.

Overall, total mining exploration spending in Australia dropped almost 10%, buoyed by sharp growth in iron and coal investment.

That compares with a 42% drop in non-ferrous exploration budgets worldwide, according to the Metals Economics Group in Halifax, Nova Scotia.

For mineral discoveries, "The number of initial resource announcements – which had been on a downtrend since mid-2008 – turned up slightly at the end of 2009 thanks to a jump in the number of new small gold resources," says MEG.

Bob Lyons at Smith & Williamson says the marginal cost of production for gold is now at $1000 an ounce, but project planning remains pessimistic, based on a price of $700 and thus capping new exploration and development.

Natixis, in contrast, pegs the cost of extraction near $550 an ounce, giving the gold mining industry "every incentive to find new mines or reopen old ones such as Boddington.

"Gold prospectors such as Anglogold have even been examining the possibility of exploring for undersea deposits," it says – "vast untapped metal resources."

On the political front meantime, Germany's economy minister in Berlin – where Greek prime minister George Papandreou is due for talks to resolve his country's debt crisis – told reporters on Friday that "The German government does not intend to give one cent" in aid to its struggling southern partner in the 16-nation Eurozone.

The European Central Bank held its key policy rate at a record low of 1.0% on Thursday, and "One consideration the ECB has to bear in mind is how banks get through this tough period," writes Steven Barrow at Standard Bank today.

"The markets are only too well aware that Eurozone banks hold more Eurozone sovereign debt than any other banks by a country mile...some 80% of Greek sovereign debt [and] around 90% for Spanish debt."

The Euro dropped half-a-cent on Friday's US jobs data, pushing the gold price in Euros back above €835 an ounce.

"If sovereign pressures escalate – as we believe they will – the ECB could still have a job to do," says Barrow, forecasting that the next move in Euro interest rates could be down, rather than up. 

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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