Hedge-Fund Giants Buy Gold to Hedge Against Inflation

By: Adrian_Ash

THE PRICE OF GOLD touched a new 7-week high of $1228 per ounce on Tuesday morning in London, rising for US investors as world stock markets crept higher and the Dollar fell against both the Euro and Yen.

Crude oil slipped towards a five-week low, but new data showed US factory-gate inflation jumping from 2.8% to 4.2% year-on-year last month.

Bank of England governor Mervyn King was meantime forced to write an open letter to the UK chancellor, admitting that "the recent strength of inflation has surprised" his executive committee, now running above the government's official tolerance of 3.0% per year for 8 months running.

The Pound gave back half of Monday's 1.5¢ gain on the news, slipping to $1.5610 and nudging the gold price in Sterling up to a new 1-month high above £786 an ounce.

South Korea's central-bank chief Kim Choong Soo meantime said in a speech that he fears "heightened volatility" in global business activity, while financial markets "may prove turbulent."

"[Gold's] place as the ultimate hedge against risk remains secure," says the new ABN Amro Metals Monthly from London's VM Group today, "especially since the outlook for the US Dollar remains weak as far as the eye can see, with US interest rates likely to remain pinned to the floor well into 2011."

Noting the Bank for International Settlement's "alarmingly inept" handling of last month's BIS gold swap news, "Of much greater consequence is the almost complete drying-up of the well of official sector sales," says VM, putting Western European sales over the last 11 months at just six tonnes.

Under their current Central Bank Gold Agreement (CBGA), the 18 signatories have an annual limit of 400 tonnes.

Meantime in gold investment, "August is traditionally a month when a lot of decisions get put on hold and that's especially true this year," VM goes on.

"While all those investors who have joined the bull-run are reluctant to cut their long positions [however], the ranks of those seeking to join the party are thinning,"

Regulatory filings made Monday showed that George Soros – the legendary hedge-fund manager who called gold investment "the ultimate bubble" in March – reduced his share-holding in the SPDR Gold Trust by 6% between April and end-June.

The rising price of gold, however – plus heavy sales of other stocks – pushed the gold ETF up to 13% from 7% of his Soros Fund Management's US equity portfolio.

The SPDR's gold-backed trust shares also became the largest single holding in Eton Park's $13 billion hedge funds, says Bloomberg, and remained the largest single position for John Paulson's $31 billion funds.

The trust's London-held hoard ended Monday unchanged for the third session at 1286 tonnes, after selling by shareholders reduced its gold bullion holdings some 3% from late June's record level of 1320 tonnes.

Over that period, the price of gold dropped 8% to the first-week of August, starting from its own new record of $1262 an ounce.

"I was expecting more of a correction" in gold prices says Phil Smith in his latest chart analysis for Reuters Technical in Beijing, "as the market is getting towards overbought and could do with some consolidation of the recent gains."

Yesterday was "the eleventh up day in the past fourteen trading sessions since [gold] found its low at $1158" three weeks ago, notes the latest technical analysis from Scotia Mocatta.

Short term, "Gold looks attractive while it holds above its former August high of $1211."

"The price level of $1220 an ounce forms a strong level of support," reckons Ong Yi Ling at Philip Futures in Singapore, speaking to Reuters.

"The recent rally might induce some profit-taking activity among investors who have positions in gold when it was at sub-1200 prices."

Major government bonds were little changed, meantime, with the 10-year US Treasury yield ticking up to 2.60%.

Last week saw record issuance of new debt by "junk" rated US companies raising cash, putting 2010 well on target to beat last year's record annual sales, reports the Wall Street Journal.

Month-to-date sales of $21 billion are "especially high for August" according to data from Dealogic, more than 3 times the "typically quiet" averaged over the last decade.

Thanks to low default rates and near-zero Federal Reserve borrowing costs, "You see investors piling more into the high-yield market," says Garman Research's Christopher Garman.

"It becomes part of a virtuous cycle that allows lower-rated companies to refinance their liabilities."

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

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