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Gold Has Not Peaked as Inflation Forces Investors to Take Risks

Commodities / Gold and Silver 2010 Mar 08, 2010 - 07:42 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF WHOLESALE gold bullion held tightly to last week's close of $1135 an ounce on Monday in London, recovering an early dip for UK and Eurozone buyers as stocks and bonds also stayed flat.

The US Dollar ticked higher on the currency market. US crude oil contracts ticked higher towards $82 per barrel.


"Technically gold still looks healthy," says one Hong Kong dealer in a note today, predicting that the Dollar gold price will "re-attempt to break above last week's high at $1145."

"[Friday's finish was] constructive," agrees bullion bank Scotia Mocatta, because "we are above the highs of the past two weeks.

"Our initial topside target is the 2010 high of $1,161."

Hitting new all-time highs last week for UK, Swiss and Eurozone investors, the gold price "is being lifted by the rest of the commodities complex" reckons Steven Zhu, chief trader at Tonglian Futures in Shanghai, speaking earlier to Bloomberg.

"Dollar weakness is generally positive for gold."

Adding 9.4% for Eurozone investors so far in 2010, "The gold story is still there and I have faith in it, but now it is happening against a background of a strengthening Dollar," counters Colin McLean at SVM Asset Management in London, speaking to InvestmentWeek.

"There is a growing concern over other countries and people need to find a stable store of value."

French president Nicholas Sarkozy this weekend contradicted Germany's hard line on rumors of a Greek government rescue, saying that "If Greece needs [help], we'll be there.

"Speculators...must know that 'solidarity' means something."

Potential French presidential challenger Dominique Strauss-Kahn, presently the International Monetary Fund's managing director, said today "There's no reason" to expect the Greek crisis to spread.

Proposals from the IMF, leaked last week, that central banks should now target very much higher inflation to stoke economic growth were dismissed "as simply plain nonsense" by former Federal Reserve chairman Paul Volcker in an interview with Germany's Frankfurter Allgemeine Zeitung newspaper.

Current Fed chairman Ben Bernanke recently featured on the front-cover of Germany's Focus magazine – the country's 3rd biggest weekly – above the headline "Mr.Inflation".

"The central banks are forcing people to take on risk," says UK asset manager John Chatfeild Roberts, head of Jupiter's Merlin funds.
 
"It is a difficult time to invest and you have to make sure you preserve people's wealth," says Chatfeild Roberts, telling CityWire in an interview that his portfolios now carry a 5-7% exposure to gold and gold mining shares.

Jupiter's Merlin funds now control 9% of the UK's £37 billion ($56bn) fund-of-fund investments.

"Gold has not peaked out and is insurance partly on the currency. It does not seem like a bubble."

Exchange-traded gold fund holdings were largely unmoved last week, with the UK's GBS ETF – which is also listed in Paris, Frankfurt and Milan – leaving the quantity of gold needed to back its trust-fund shares unchanged below 119 tonnes, its smallest hoard in 14 months.

Gold bullion holdings for the SPDR Gold Trust – the world's largest gold ETF – meantime added little more than 0.8% last week, reaching the largest level since mid-Jan. at 1116 tonnes.

Leveraged speculation in New York gold Futures and options, in contrast, leapt once again, swelling for the third week running according to figures released by US regulator the Commodity Futures Trading Commission.

The "net long" position of bullish minus bearish contracts held by hedge funds and other large speculative players grew some 7% in the week to last Tuesday, overtaking the last 12 months' average by the same proportion, but still lagging October's all-time record level by more than one fifth.

Overall, speculative investment in bullish gold futures and options has now recovered almost one-half of Oct-to-Jan.'s 32% drop, rising to the equivalent of 836 tonnes of metal.

The growth is "mostly due to technical moves rather than fresh investor interest" says Dow Jones Newswires today after speaking with Edel Tully, now head of precious metals analysis at Swiss banking giant UBS.

"The relatively low level of speculative interest indicates that both [gold and silver] are set to be less sensitive to Dollar appreciation than Dollar depreciation," says Standard Bank's Walter de Wet in a note.

"We still favor gold and silver in Euros [but] would look for a large rally...once the Dollar starts to depreciate again."

By Adrian Ash
BullionVault.com

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 www.BullionVault.com , 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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