Gold gaining investors as U.S. prints trillions

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

* * *
Join GATA here:
Phoenix Resource Investment Conference
Renaissance Glendale Hotel and Spa
Glendale, Arizona
Saturday-Sunday, February 21-22, 2009
http://www.cambridgeconferences.com/ch_phoenix2009.html

Help keep GATA going
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/.