Rally in gold prices may still go further

Geneva: Investors are accumulating enough bullion to fill Switzerland's vaults twice over as gold's most-accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.

Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 (Dh 5,508) an ounce by December, or 18 per cent more than the record $1,266.50 reached June 21.

Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tonnes, within 0.1 per cent of the all-time high.

"Either a swift economic recovery or further dismal economic performance should bring new buyers into the market," said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. "A stronger economy would create more jewellery demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven."

Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 per cent on August 24 and the yen reached a 15-year high against the dollar the same day.

Pacific Investment Management Company, Deutsche Bank AG and Citigroup have announced or are offering funds or traded instruments designed to guard against sudden market declines.

Swiss reserves

Buyers accumulated almost 278 tonnes of gold in 2010 across 10 ETPs tracked by Bloomberg, worth $10.4 billion at this year's average price. Total holdings are almost twice Switzerland's official reserves of 1,040 tonnes, data compiled by the World Gold Council show.

ETP holdings reached a record 2,078 tonnes on July 19, data compiled by Bloomberg show.

One of the biggest buyers has been Soros Fund Management, which oversees about $25 billion. George Soros, who made $1 billion breaking the Bank of England's defence of the pound in 1992, described gold as "the ultimate asset bubble" at the World Economic Forum's January meeting in Davos, Switzerland.

Buying at the start of a bubble is "rational", he said.

Soros Fund Management sold 341,250 shares of the SPDR Gold Trust, the largest ETP backed by bullion, in the second quarter, according to an August 16 Securities and Exchange Commission filing. That still left a holding of 5.24 million shares, equal to almost 16 tonnes. Soros declined to comment on the change, through a spokesman.

Accurate forecasters

Gold may rise as high as $1,500 next year, 21 per cent more than the $1,235 traded at 9 a.m. in London, according to the median in a Bloomberg survey of 29 analysts, traders and investors. Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, says the metal may reach $1,550.

Bullion gained 13 per cent since January, beating an 8.4 per cent return on Treasuries, an 8 per cent decline in the MSCI World Index of shares and the 10 percent slump in the S&P GSCI Total Return Index of 24 raw materials.