Imagine if any of this money went into real metal, not just paper

Speculative Investment in Gold Seen Broadening

By Matt Whittaker
The Wall Street Journal
Friday, November 13, 2009

http://online.wsj.com/article/SB1000142405274870368380457453392383374604...

A broad spectrum of participants are buying up gold as it sits at record highs, all hoping to add a little glitz to their portfolio.

To be sure, some of the gold demand is from jewelry fabricators or buy-and-hold type investors such as those who purchase small bars and coins. But a large chunk is also coming from those who move in and out of the market more often. The sharp gains in gold -- up about 26% on the year -- have made it all the more alluring to these speculators who do not need physical metal and are making short-term bets on price direction.

The seemingly constant string of fresh record highs is only encouraging more participation in the market, said Kevin Kerr, editor of Kerr Commodities Watch newsletter.

Investment is "much broader than we've ever seen before," Mr. Kerr said. "People are participating that never have before."

Individual investors are broadening out from buying just the odd mining share or gold mutual fund and are now buying exchange-traded funds -- which can be had like stocks -- and futures that are more accessible through new trading platforms.

This type of individual investment is combining with money flows from hedge and index funds as participants look for a U.S. dollar and inflation hedge.

According to Nov. 6 data from the U.S. Commodity Futures Trading Commission, the government oversight agency for the futures industry, speculative managed-money funds now hold more than 23 million ounces in positions indicating they think the metal's price will rise on the Comex division of the New York Mercantile Exchange. That was out of 52.1 million outstanding contract ounces.

Since the beginning of October, holdings in the world's largest physically backed ETF, SPDR Gold Trust, have risen to 35.8 million ounces from 35.2 million ounces.

"All told, investors poured $552 million into gold bullion ETFs in October," a Morningstar report said.

As of Nov. 5, holdings in 12 gold ETFs monitored by Goldessential.com stood at 56.7 million ounces -- worth about $63.3 billion as of Friday's nearby Comex November gold settlement of $1,116.10 an ounce.

Total net assets at the end of October for more traditional precious metals mutual funds stood at $20.3 billion, for about 60 funds, said Harry Milling, precious metals mutual fund analyst with Morningstar. "Flows have been robust as you can imagine," Mr. Milling said.

Another source of speculative demand comes from more well-funded money management firms, hedge funds and bank proprietary trading desks.

Many of the hedge and index funds rely solely on computer models so they can replicate the movements of the asset class, allowing them to track futures prices similarly to ETFs and mining shares, said Kitco Metals analyst Jon Nadler.

Some hedge fund managers who have been spotlighted for their investment in gold include John Paulson at Paulson & Co. and Greenlight Capital's David Einhorn. Mr. Paulson at one point this year held nearly 9% of the SPDR Gold Trust.

In addition to futures investment or ETF holdings, speculative funds also buy and sell gold in the off-exchange over-the-counter market.

That affects prices on the futures market because these entities often offset their positions on exchanges, said Carlos Sanchez, associate director of research with CPM Group. Conversely, they also offset exchange positions with over-the-counter trades.

Index funds are also a speculative avenue. These funds invest in, for example, a basket of raw materials and allocate a fixed percentage of the money that comes in to specific commodities.

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