Business | Markets

Investors opt for gold

Supply-demand fundamentals more important than in prior QE

  • By Eric Onstad, Reuters
  • Published: 17:29 October 5, 2012
  • Gulf News

  • Image Credit: Bloomberg
  • Concerns about future inflation from central bank stimulus measures are keeping gold in the portfolios of many investors. Investors relish gold as a quasi-currency and inflation hedge.

London: Investors are going for gold as their top commodities choice in what looks like a turbulent fourth quarter for the sector, planning for the possibility of a “fiscal cliff” that could shrink the US economy and spur more money printing.

Many are wary of extending exposure in several basic resources - including industrial metals - as global economies struggle and a slowdown dampens demand in top raw materials consumer China.

Gold is the exception, since persistent concerns about future inflation from central bank stimulus measures are keeping the precious metal in the portfolios of many investors.

Previous bouts of quantitative easing (QE) have sent commodity markets soaring with other risk assets, but commodities have recently broken away from tracking equities as investors question the impact of the third round of US bond-buying along with other programmes in Europe, Japan and China.

“Quantitative easing for us is not the rising tide that lifts all boats, it’s not as straightforward as loose monetary policy must lead to higher commodity prices, with perhaps one exception,” Paul Horsnell, head of commodities research at Barclays, told a recent presentation. “It is good for gold.”

Spot gold, which hit an 11-month high on Friday, has gained 12 per cent since mid-August to just under $1,800 an ounce, while the 19-commodity Thomson Reuters-Jefferies CRB index has only added 3 per cent.

US hedge funds and money managers boosted their gold futures positions to the most bullish in almost seven months, data showed last week.

Investors relish gold as a quasi-currency and inflation hedge, especially ahead of the “fiscal cliff” in the United States of potential spending cuts and tax hikes, since the Federal Reserve will probably have to step up its QE response.

If the US Congress can’t agree a deficit reduction deal by January, $600 billion of tax hikes and spending cuts automatically come into force, which experts say would trigger a recession.

“That will mean more stimulus, and that might be another leg up for gold. In six months time, we might see gold flirting with $1,900 or $1,950,” said Pau Morilla-Giner, chief investment officer at London & Capital, which has $3.2 billion of assets, including over $400 million in commodities.

Morilla-Giner has 55 per cent of his commodities portfolio in precious metals, mostly in gold, which touched a record peak of $1,920.30 an ounce in September 2011.

With many other commodities struggling, the bounce from QE may already be largely priced in after the sector rebounded in July and August as policymakers hinted at more stimulus measures.

Commodities had the biggest quarterly gain in nearly two years during the three months to September.

The CRB index gained a fifth from late June until mid-September, but has since drifted as investors refocus attention on poor economic data, especially in Europe and China.

On Monday, manufacturing data showed euro zone factories suffered their worst quarter since early 2009 and activity in China also contracted for a seventh consecutive quarter.

The concerns have translated into the first drop in long commodity positions in six weeks as hedge funds and other bid speculators pulled more than $5 billion from US commodity markets, trade data showed last week.

Gabriel Garcin, a portfolio manager at Europanel Research & Alternative Asset Management in Paris, which invests in European hedge funds and CTAs, says in the current environment, specialist commodity funds will increasingly have an advantage.

“Commodity managers who have a physical background, who know the supply-demand dynamics have a real edge in these market conditions,” he said.

The move towards more fundamental-based price action is occurring as commodities break away from tracking other risk assets.

The 30-day correlation between the CRB and the S&P 500 equity index dropped from 71 per cent in early August to 24 per cent on September 25, a matter of days after the US Federal Reserve announced unlimited purchases of mortgage securities, before settling at 32 per cent on Friday.

Much of the focus on fundamentals centres on demand from China, which uses 40 per cent of the world’s copper and is the second biggest energy consumer after the United States.

Caution about China has led Koen Straetmans at ING Investment Management in the Netherlands to rate commodities slightly underweight.

The group, which has 295 billion euros ($383.65 billion)under management worldwide, prefers equities and real estate for the time being.

“The Chinese data so far have been on the weak side,” said Straetmans, senior strategist at the group, who said he is closely watching for a rebound. “We still expect a bottoming in Chinese economic data between now and the end of the year.”

Straetmans said his underweight decision was partly based on analysis of two sectors, energy and grains. They contributed strongly to the third quarter’s strong performance, but are “segments that I consider are peaking or close to peaking.”

He was less enthused than most on gold.

“I’ve seen quite a build-up in speculative non-commercial positions in both gold and silver and it feels to me it’s getting a bit stretched.” ($1 = 0.7689 euros)


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