Gold Traders Get More Bullish as Central Banks Hoard More

Gold traders are becoming more bullish after central banks continue to expand their bullion reserves. On April 25th, Fed Chairman Ben Bernanke announced that he will be prepared to "do more" if needed in an attempt to spur growth within the economy.

By Nicholas Larkin
April 27, 2012
BusinessWeek

Gold traders are more bullish after central banks expanded their bullion reserves and hedge funds increased bets on a rally for the first time in three weeks.

Fourteen of 28 analysts surveyed by Bloomberg expect prices to gain next week and nine were neutral, the highest proportion in two weeks. Mexico, Russia and Turkey added about 44.8 metric tons valued at $2.39 billion to reserves in March, International Monetary Fund data show. Fund managers raised their so-called net-long positions by 2.5 percent in the week ended April 17, according to the Commodity Futures Trading Commission.

Federal Reserve Chairman Ben S. Bernanke said April 25 that he’s prepared to “do more” if needed to spur the economy, and the Bank of Japan (8301) today expanded its bond-purchase plan by 10 trillion yen ($124 billion). Gold rose about 70 percent as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing ending in June 2011. The U.K. fell into its first double- dip recession since the 1970s, data showed April 25, while the IMF predicts the 17-nation euro region will contract.

“Ultra-loose monetary policies of recent years don’t look like they’re going to end any time soon,” said Mark O’Byrne, the executive director of Dublin-based GoldCore Ltd., a brokerage that sells and stores everything from quarter-ounce British Sovereigns to 400-ounce bars. “The problems in the euro zone don’t look like they’re going to end any time soon. We’ve had a dip, and our advice to clients is always to buy the dip.”

Gold Gains

Gold rose 5.7 percent to $1,656.10 an ounce this year on the Comex in New York, and is now 7.6 percent below this year’s peak. The Standard & Poor’s GSCI gauge of 24 raw materials climbed 5.8 percent as the MSCI All-Country World Index (MXWD) of equities added 9.5 percent. Treasuries gained less than 0.1 percent, a Bank of America Corp. index shows.

Options traders are also bullish, with the most widely held contract on futures traded on the Comex conferring the right to buy at $2,200 by July, 33 percent above prices now. The seven most popular options give owners the right to buy at prices ranging from $1,800 to $2,300, bourse data show.

Central banks are joining investors in buying gold, adding 439.7 tons in 2011, the most in almost five decades, the London- based World Gold Council estimates. They may buy a similar amount this year, it predicts. Mexico bought 16.8 tons last month as Russia added 16.5 tons and Turkey’s holdings expanded by 11.5 tons. Kazakhstan, Ukraine, Tajikistan and Belarus also raised reserves, according to the IMF.

Hedge Funds

Speculators increased wagers on price gains to 112,275 futures and options, from a three-year low the previous week, CFTC data show. The net-long position is still 56 percent below the peak reached in August. That provides “ample room” for new long positions, Edel Tully, an analyst at UBS AG in London, wrote yesterday in a report.

Investors own 2,389.6 tons in bullion-backed exchange- traded products, within 0.9 percent of the record reached on March 13, data compiled by Bloomberg show. Demand for bullion coins is weakening, with the U.S. Mint selling 17,000 ounces so far this month, compared with an average 75,917 ounces in the previous 12 months, data on its website show.

The Fed said two days ago that growth will “pick up gradually” as the labor and housing markets show signs of improvement. About $4.99 trillion was added to the value of global equities this year on optimism the world will skirt another recession. The IMF raised its global growth outlook to 3.5 percent from 3.3 percent on April 17, while forecasting a 0.3 percent contraction in the euro area.

U.S. Recovery

“If people really believe that the U.S. recovery is coming through, I think they will buy equities,” said Carole Ferguson, an analyst at Fairfax IS in London. “Gold is more likely to go sideways.”

Other investors may also be shunning gold. Open interest, or contracts outstanding, in U.S. futures declined to 395,389 on April 24, the lowest level since September 2009, bourse data show. That contrasts with combined open interest across the 24 commodities in the S&P GSCI, which rose 18 percent this year.

Bullion slid from a record $1,923.70 in September, taking it below the 200-day moving average, a sign of more declines to some investors. That may present a “buying opportunity,” GoldCore’s O’Byrne said. Prices held above the measure from the beginning of 2009 through the end of last year.

The metal will trade at $1,940 in 12 months, Goldman Sachs Group Inc. said in an April 24 report. The bank maintained a neutral outlook on raw materials in the near term, partly because of European debt concerns.

Benchmark Contract

In other commodities, 12 of 28 traders and analysts surveyed by Bloomberg expect copper to climb next week and eight were neutral. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, rose 10 percent to $8,378.25 a ton this year.

Six of 13 people surveyed said raw sugar will decline next week and three were neutral. The commodity dropped 8.9 percent this year to 21.23 cents a pound on ICE Futures U.S. in New York. Eighteen of 29 people surveyed anticipate higher corn prices next week, while 16 of 30 said soybeans will advance. Corn slipped 5.2 percent to $6.1275 a bushel this year as soybeans climbed 24 percent to $14.9175 a bushel.

“It should be the macro factors and political uncertainties that influence the markets most, and less the fundamental factors,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. “The sovereign debt crisis should stay in focus. I think it’s premature to say that we have seen the worst.”

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: John Deane at jdeane3@bloomberg.net

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