Gold gaining investors as U.S. prints trillions
Riaz K Tayob
By Frank Tang and Jennifer Ablan
Reuters
Wednesday, January 28, 2009
http://uk.reuters.com/article/personalFinanceNews/idUKLNE50R00P20090128
NEW YORK -- Gold, the traditional safe haven in times of economic
turmoil, proved to be more a commodity that everyone loved to hate last
year even amid the turbulence that engulfed world markets.
But as 2009 gets under way the yellow metal has found huge traction with
money managers.
In the last eight sessions, gold has rallied as much as $100 an ounce to
hit a near four-month high of $915.30 on Monday -- in spite of a rising
dollar.
The furious rally in the bullion stems from expectations that the U.S.
government will need to borrow about $2 trillion of debt this year to
finance its rescue packages for the battered banking sector. Already,
outstanding Treasury debt stood at $5.5 trillion at the end of September.
Against this backdrop, investors are largely shunning everything from
U.S. Treasuries to stocks, which are down 10 percent and 7.5 percent so
far this year, respectively, while pouring cash into gold.
"I think gold is rising because of fiscal deterioration and the prospect
that the U.S. may be downgraded," said Tom Sowanick, chief investment
officer for $22 billion in assets at Clearbrook Financial LLC in
Princeton, New Jersey.
On January 13, credit rating agency Standard & Poor's said that the
ballooning costs of rescuing U.S. banks and auto companies, combined
with a massive fiscal stimulus plan by President Barack Obama "will lead
to (a) noticeable deterioration in the U.S. fiscal profile."
"They are printing trillions of dollars worth of currencies, and there
is no real asset behind it. So every single dollar in my pocket is going
to be worth less and less every day," said Robert Lutts, chief
investment officer of $400 million Cabot Money Management in Salem,
Massachusetts.
Sowanick believes gold can move up to around $1,700 per ounce. Gold hit
an all-time high of $1030.80 on March 17, 2008, following the collapse
of Bear Stearns.
That said, gold has been the commodity everyone loves to hate because it
hasn't lived up to expectations as a real safe haven and has been a
mediocre investment until now.
Gold ended 2008 up only 5.4 percent for the year during the credit
crisis that claimed some of the biggest investment banks including Bear
and Lehman Brothers.
But now gold has not only held firm in a deflationary environment but
has appreciated to record highs against major non-U.S. currencies in the
face of a stronger dollar.
Bullion usually moves in the opposite direction to the dollar as it is
widely used as a hedge against the U.S. currency.
On Monday, gold priced in euros reached an all-time high of 701.55 an
ounce, and in sterling at 661.55 pounds.
Indeed, fund managers said that currency volatility was a big factor to
prompt investors to switch to the gold market to avoid losses.
"It's a flight from all cash to gold in any currencies right now,
because it becomes obvious that everybody wants to inflate out of this
problem," said Axel Merk, portfolio manager of the $310 million Merk
Hard Currency and Asian Currency Funds in Palo Alto, California.
Merk said investors recently allocated more weight into gold because it
has no counterparty risk, unlike traditional asset classes.
Gold, which produces zero interest yield, also became more attractive as
governments in the industrial world slashed interest rates to the bone,
Merk said.
Another testament to gold's strong investment appeal was the soaring
popularity of gold-backed exchange-traded funds. Gold ETFs broaden
access to individual investors, allowing them to buy gold on a stock
exchange without taking physical delivery of the metal.
Bullion held by the world's largest bullion-backed ETF, New York's SPDR
Gold Trust, commonly known as GLD, said its holdings rose to a record
832.88 tonnes on January 26, up 53 tonnes since the beginning of the
year. Gold ETFs in Europe also reported sharp increase.
"GLD holdings are rising because retail investors are finally thinking:
'My stock market investments are absolutely rubbish and I don't trust my
bank account. So, what are the other alternatives?' They want to buy
some gold, and the first thing they came across is GLD," said Tom Dyson,
editor of DailyWealth.com