Gold Bulls Dominant as Portugal Stokes Debt Concern

Gold traders are the most bullish in a month after political instability in Portugal raised concern over Europe's debt crisis. The record quarterly price drop for the metal drove demand for jewelry. Fourteen analysts surveyed by Bloomberg expect prices to rise next week.

By Nicholas Larkin
Jul 5, 2013 8:02 AM MT
Bloomberg

Gold traders are the most bullish in a month after political instability in Portugal raised concern that Europe’s debt crisis will worsen and as a record quarterly drop in prices drove demand for jewelry.

Fourteen analysts surveyed by Bloomberg expect prices to rise next week, with 10 bearish and three neutral, the largest proportion of bulls since June 7. While hedge funds are the least bullish in six years and holdings in exchange-traded products dropped to a three-year low, demand for physical metal has been “strong,” Standard Bank Group Ltd. said.

Gold slid 23 percent last quarter after some investors lost faith in the metal as a store of value as the Federal Reserve said it may taper stimulus. The slump into a bear market in April spurred demand for jewelry and coins around the world, and imports into Turkey, the fourth-biggest consumer, expanded to a 4 1/2-year high. Prices advanced earlier this week as two Portuguese ministers resigned, pushing the nation’s borrowing costs to the highest in seven months.

“A recovery will be tentative initially but a return of the euro zone debt crisis could spark a more sustainable rally,” said Mark O’Byrne, the executive director of Dublin-based GoldCore Ltd., a brokerage that sells and stores bullion coins and bars. “Many jewelers internationally are likely to use the recent price falls as an opportunity to stock up.”

Gold Price

The metal fell 28 percent to $1,213.48 an ounce in London this year, after 12 consecutive annual gains. Gold reached a 34-month low of $1,180.50 on June 28. The Standard & Poor’s GSCI gauge of 24 commodities declined 2.5 percent since the start of January and the MSCI All-Country World Index of equities rose 5.1 percent. Treasuries lost 2.5 percent, a Bank of America Corp. index shows.

Portugal’s 10-year bond yield surged above 8 percent on July 3 for the first time since November after the resignations, adding to speculation that a rift might hamper the government’s ability to meet the terms of a European Union-led bailout. Concern about a worsening debt crisis at a time when central banks around the world increased stimulus measures helped push gold to a record $1,921.15 in September 2011.

Crude oil rose above $100 a barrel this week for the first time since September as the ouster of Egypt’s President Mohamed Mursi fanned concern that unrest will disrupt Middle East supply. Some investors judge that higher oil prices stoke inflation and buy gold as a hedge. Expectations for consumer-price gains, as measured by the break-even rate for 10-year Treasury Inflation Protected Securities, rose 12 percent since reaching a 20-month low on June 24.

Turkey’s Imports

Turkey’s bullion imports more than doubled to 45.5 metric tons in April and held above 43 tons in May and June, the longest run in data on the Istanbul Gold Exchange’s website going back to 1995. Jewelry accounted for about 60 percent of the country’s consumer demand for gold last year and made up 43 percent of global demand, according to the World Gold Council.

Rising premiums for gold in China signal strengthening demand, Standard Bank said in a report July 3. The metal for immediate delivery in China averaged about $37 more than the London price since mid-June, Shanghai Gold Exchange data show. It was about $21 before then. Premiums also rose in India, in part because the government imposed curbs on imports to trim the trade deficit, Commerzbank AG said in a report yesterday.

Demand for gold coins is weakening. The U.S. Mint sold 19 percent fewer ounces of American Eagles in June than in May and 73 percent less than in April, its website shows. Australia’s Perth Mint said its coin and bar sales dropped for a second month in June, falling 47 percent.

ETP Holdings

Investors sold 595 tons from ETPs this year, erasing $60.9 billion from the value of holdings, data compiled by Bloomberg show. They now own 2,036.9 tons, the least since May 2010. ETP assets may fall another 500 tons, Dominic Schnider, head of commodities research at UBS AG’s wealth-management unit in Singapore, said in a July 4 Bloomberg Television interview.

Analysts and traders surveyed by Bloomberg two weeks ago had been the most bearish in 3 1/2 years after Fed Chairman Ben S. Bernanke said the central bank may slow asset purchases this year if the economy improves. The 10-year yield on Treasuries reached a 22-month high on June 24.

Hedge funds and other large speculators held a net-long position of 31,197 contracts as of June 25, the least since June 2007, and had a near-record number of short contracts betting on a decline, U.S. Commodity Futures Trading Commission data show. The scale of the bearish bets may magnify any rally as speculators close out their wagers by buying back contracts, Macquarie Group Ltd. said in a report July 1.

Break Even

Goldman Sachs Group Inc. says gold will reach $1,050 by the end of 2014, Credit Suisse Group AG anticipates $1,150 in about 12 months and Danske Bank A/S (DANSKE) sees a drop to $1,000 in three months, taking prices below the level some mines need to break even. Production cuts will be larger than most investors expect and boost prices, Mark Cutifani, the former head of AngloGold Ashanti Ltd. (ANG), the third-biggest gold miner, said June 26.

Four of 10 people surveyed expect raw sugar to fall next week and three were bullish. The commodity slid 16 percent to 16.30 cents a pound on ICE Futures U.S. in New York this year.

Fifteen of 25 surveyed anticipate lower corn prices and six said the grain will rise, while 13 of 24 said soybeans will fall and 10 expect higher prices. Ten traders predicted declines in wheat and seven were bullish. Corn dropped 29 percent to $4.9625 a bushel this year in Chicago. The December contract, which reflects supply after the U.S. harvest, is down 17 percent this year. Soybeans fell 12 percent to $12.4325 a bushel, as wheat slipped 15 percent to $6.6475 a bushel.

Three Months

Seven traders and analysts surveyed expect copper to drop next week, six were bullish and one was neutral. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, fell 15 percent to $6,753 a ton this year.

Investors should reduce their holdings in raw materials and buy equities, UBS said in July 2 report, rating industrial metals as “underweight” in part because of slower growth in China. The bank joined Citigroup Inc. and Goldman Sachs in calling an end to the commodities super cycle, or longer-than-average period of rising prices.

“A lot of negative sentiment toward commodities today is based on poor performance over the past year or two relative to equities,” said Nicholas Brooks, the head of research and investment strategy at ETF Securities Ltd. in London. “Many commodities are trading at or below the marginal cost of production. It may not stop prices from falling in the short term, but in the medium term rising costs will ultimately force prices to move higher.”

Gold survey results: Bullish: 14 Bearish: 10 Hold: 3
Copper survey results: Bullish: 6 Bearish: 7 Hold: 1
Corn survey results: Bullish: 6 Bearish: 15 Hold: 4
Soybean survey results: Bullish: 10 Bearish: 13 Hold: 1
Wheat survey results: Bullish: 7 Bearish: 10 Hold: 3
Raw sugar survey results: Bullish: 3 Bearish: 4 Hold: 3
White sugar survey results: Bullish: 1 Bearish: 4 Hold: 5
White sugar premium results: Widen: 1 Narrow: 5 Neutral: 4

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