FT surveys some fund managers about gold

Funds Grow Uneasy as Gold Glitters

By Chris Newlands
Financial Times, London
Sunday, December 6, 2009

http://www.ft.com/cms/s/0/d6860222-e0d6-11de-9f58-00144feab49a.html

The price of gold continues to trade at fresh highs, so the fact that a quarter of global fund managers say it is overvalued should come as no surprise.

According to the results of Bank of America Merrill Lynch's November fund manager survey, which polled 218 managers with some $530 billion of assets under management, 25 per cent say the asset class was too expensive -- up from 11 per cent in October when the same managers were asked.

"The continuing spike in the gold price leaves investors increasingly uneasy," says BoA Merrill Lynch. But that has not stopped people piling in. At the time of writing, the spot price of gold had finally broken the $1,200 per ounce mark, almost 40 per cent higher than it was 12 months ago.

Analysts claim the gold rush is the result of inflation fears. Investors regard inflation as a bigger risk than deflation, says BoA Merrill Lynch, and are trying to hedge against this risk with overweight positions to commodities.

"Demand for assets that protect against inflation, such as gold, oil, and emerging market equities, has increased," says Michael Hartnett, chief global equity strategist at BoA Merrill Lynch Global Research. "Commodities are at their most popular since the survey first asked about the asset class in 2005." He adds that a net 25 per cent of managers are overweight on commodities, again up from 11 per cent when the same managers were surveyed in October.

It was always likely to be third time lucky for gold, believes Bill O'Neill, portfolio strategist at Merrill Lynch Global Wealth Management. "Twice the price tested the $1,000 mark, in March 2008 and in February this year. If there is even a hint of worry that central banks are being over-generous in the extent and duration of their monetary stimuli, gold will become everyone’s touchstone. Investors worried about the quality of currency or government bonds they are holding will seek the reassurance of gold," he says.

The big question is whether prices will continue to head north. Daniel Sacks, co-portfolio manager of the Investec Global Gold Fund, thinks so. "As forecast, the gold price smashed through its previous record high," he says.

"We believe it should continue to perform well against most assets into the final quarter of 2009. Moreover, the price of gold is still just over half of its prior peak in real terms, even after the rally of the past eight years."

The 1980 nominal peak price of $850, adjusted for inflation, equates to an equivalent price of $1,884 today, explains Mr Sacks.

With the fear of a significant financial crisis seemingly waning, he adds, debate is now turning again to how the recovery will play out. "In almost all but a global soft-landing scenario, gold is likely to rally further. With a global recovery unlikely to be smooth, the two main risks to most asset values are inflation and US dollar weakness -- both of which are decisively gold positive," he says.

Richard Lockheed, chief executive of New City Investment Managers, has a similar view. The gold price is measured in one of the weakest currencies in the world, he says, and as long as it appears that the US administration is not worried about the dollar falling, he is "relaxed" about gold.

Gold is not in a bull market, Mr Lockheed maintains. In the main producing countries, the gold price has not gone up because of the currency effect, he points out.

"There are still lots of disbelievers on the gold price, who say the price will be half what it is in three years," he says. But he is confident the price will not return to where it was six or seven years ago.

Asset houses lining up to bring gold funds to market must concur.

In October, Swiss house HWB Capital Management launched a gold and silver fund; Credit Suisse rolled out a physically backed gold ETF; while Pictet unveiled a physical gold fund, domiciled in Switzerland and denominated in dollars.

Philippe Pol, who runs the new Pictet fund, believes gold will remain popular as investors try to hedge against inflation and currency fluctuations.

Hedge fund guru John Paulson, who raked in $20 billion in 2007 by betting against financials and all things subprime, also plans to jump on the gold bandwagon. He intends to launch a fund at the beginning of next year, which will invest in gold-related shares and gold derivatives.

Mr Paulson says he is keen to tap into investor concern about both a weak US dollar and inflation. Baring Asset Management’s Andrew Cole, however, is less gung ho. "Now might be a bad time to get involved in gold for the first time," he says. "Might we see a last hurrah in prices before the end of the year? Maybe, but I wouldn't buy anything based on some of the $1,300 predictions going around. A correction is due."

His is something of a lone voice, however.

Broad money in a number of key currencies expanded seven to 10 times faster than the supply of gold in 2008. This trend is likely to continue over the next 18 months, according to Merrill Lynch. If emerging market central banks come to the conclusion that gold at current prices is better value and offers lower political risk than government bonds denominated in euros or dollars, reserve diversification into gold will continue, the company says.

"Further reinforcing our positive outlook for gold is continued safe-haven buying as an alternative currency, with gold the only currency whose production is going down, not up," says Investec's Mr Sacks.

"There is also little chance of a supply response to high gold prices. Mine production is on a declining trend."

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