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Hedge Funds Remain Bullish on Gold in 3rd Quarter

Release Date: 
Saturday, November 17, 2012

Hedge Funds Remain Bullish on Gold in Third Quarter

November 17, 2012

American Advisor host Joe Battaglia provides a wrap-up of the week's precious metals news along with important commentary every week on the American Advisor Week in Review audio program. Click here to listen.

The price of gold moved lower with the euro hitting two-month lows after last week’s post-election boost for the precious metal. Gold was $24.75 lower for the week, settling at $1,713.50 per ounce at 2:15 PM Pacific  Time at the New York Spot Market close, while silver was $0.11 higher, closing at $32.27 per ounce.

Violence in the Middle East sparked concern over oil supplies as Hamas militants fired rockets into southern Israel and Israel retaliated with air strikes across the Gaza Strip.  Saxo Bank vice president Ole Hansen said rising tensions may support gold if the situation deteriorates.  "An all-out war would trigger high oil prices leading to higher inflation and subsequently a return to recession," which would support gold, Hansen said.

Hedge funds remained bullish on gold in the third quarter.  Billionaire investor George Soros increased his hedge fund’s gold holdings in the third quarter by 50 percent, regulatory filings showed.  Billionaire Louis Moore Bacon also increased his gold holdings.

Billionaire hedge fund manager John Paulson continued to hold his significant gold stake in the third quarter after making a $374 million quarterly gain.  In the second quarter, Paulson raised his stake in gold for the first time since the first quarter of 2009.  A Paulson executive said the firm remained bullish on gold and analysts took Paulson’s continued investment in gold as a sign that the well-known gold bull has not lost his faith in the precious metal as a long hedge against inflation. 

Participants at the annual London Bullion Metal Association conference on Tuesday believe gold could reach $1,843 per ounce by September 2013, with silver predicted to rise to $38.40 per ounce.  More than half of those polled expect the Fed to launch another round of quantitative easing.  The conference included analysts, bankers, miners, refiners and jewelers.  The projected rise of 6.7 percent in the price of gold is based on expectations for growing demand in Asia, particularly China, along with a continuation of easy monetary policy in the U.S. 

The price of gold could rally to a record above $2,000 per ounce next year as central banks increase monetary stimulus to sustain the recovery, according to Raymond Key, head of metals trading at Deutsche Bank in London.  “We’ll take out $2,000, we’ll go higher,” Key said.  “That’s on the view that they’ll continue to print money.”

"The gold price is up because of a combination of the outlook for an expansionary U.S. monetary policy and fears over the 'fiscal cliff'," said Eugen Weinberg, global head of commodities research at Commerzbank.  He said gold prices could rise further and potentially break above $1,800 per ounce in the next few weeks.  Saxo Bank also says gold may soon move higher.  “Having found support and stabilized above 1700, a move above 1740 should now open the way back towards important resistance at 1800,” said analyst Ole Hansen. “We believe the direction of least resistance over the coming weeks will be to the upside.”

The U.S. fiscal cliff continues to loom as a major economic problem that could support gold.

"If we don't see an agreement and there is a gridlock, it will burden the dollar and benefit gold," said Dominic Schnider, analyst at UBS Wealth Management in Singapore.  The more probable result would be a compromise that did not completely solve the fiscal problem, which would also benefit gold, since the Federal Reserve would have to provide more stimulus to help the economy, he added.  "It is not going to be easy, and it will likely motivate renewed interest in demand for gold," Schnider said.

Gold got the best possible result out of the U.S. election, said UBS strategist Edel Tully.  With a divided Congress, there is a high likelihood of political gridlock with both the fiscal cliff and the debt ceiling now in focus, which could yield potential upside opportunities for gold. “Now…gold investors can re-focus with more clarity and pre-position themselves ahead of the important event risks up ahead, not just of a fiscal nature but also monetary policy…All in all, gold could not have asked for a better outcome. Now it’s up to buyers to step up to the plate.”

“With the fiscal cliff approaching fast, an entire new group of investors will be pouring into the precious metals in anticipation of the grim fact that the U.S. is going to try and print itself out of debt,” said David Morgan, publisher of The Morgan Report, a newsletter on precious metals investing.

Nic Brown, analyst with Natixis, said that concerns over the approaching U.S. fiscal cliff may lift gold's appeal as a safe haven asset if negotiations are protracted.  "If...agreement looks less likely, I see risks to the upside in the gold price," he said.  "With the U.S. fiscal cliff continuing to draw attention, gold looks like it could well soon benefit from fresh investor demand," traders with TD Securities said in a note.

“Obama is a supporter of Bernanke and his re-election means that the ultra-loose monetary and fiscal policies by the Fed will continue,” said Daniel Briesmann, commodities analyst at Commerzbank.  “More and more liquidity will be put into the system and therefore there’ll be inflation fears and concern about currency devaluation.”

“Now, with the certainty of the election results and four years of economic and monetary policy similar to the past four, higher gold prices seem both inevitable and imminent,” said Brien Lundin, editor of Gold Newsletter.

Gold prices may reach $2,000 an ounce in 2013 as rising costs and production constraints limit supply, while demand from central banks and Chinese consumers keeps climbing  according to Barrick Gold Corp, the world's largest gold producer.  Barrick Chief Executive Jamie Sokalsky said, "if demand continues to rise, which we think it will through China buying more gold, more investment demand for gold, (and) central banks continuing buying more gold rather than selling as they used to, I feel quite comfortable predicting that gold prices will within the next year be at $2,000, perhaps higher…"

Gold may reach $1,775 per ounce this month, said Edward Meir, analyst at INTL FCStone.  “With President Obama re-elected, the thinking now is that the Fed’s easy-money policies will likely go on.”  ANZ analysts said, "we want to reiterate our end-year target of $1,780.”

The Chinese government may add more gold to its reserves as the precious metal accounts for a lower share of total holdings compared with the U.S., according to the London Bullion Market Association.  “When comparing China to the U.S., it would seem that in China, gold asset allocation can only go in one direction,” Chairman David Gornall told the association’s annual conference in Hong Kong. “The country has only 2 percent of its reserves in the form of gold compared with the U.S. at 75 percent.”  James West, portfolio adviser to the Midas Letter Opportunity Fund, said “China is buying gold to hedge itself against the debasement in value of its U.S. bond holdings as a direct result of quantitative easing.”

China’s central bank policy is to encourage residents to hold physical gold, said Xie Duo, general director of the financial market department of the People's Bank of China (PBOC), at the London Bullion Market Association (LBMA) conference in Hong Kong.  PBOC General Director Xie Duo said the central bank had not set a time-frame on issuing more gold import licenses to banks but is eager to further open up the market to the international community.

“Emerging-market economies from the G-20 countries are looking to elevate their gold holdings,” said Ashish Bhatia, manager of government affairs at the World Gold Council. There’s “renewed interest from central banks on the demand side.”

HSBC strategists believe gold demand may pick up shortly. “We anticipate demand to remain resilient in the fourth quarter, in part due to the emerging markets, most notably in India and China,” they said.

 (Sources:  “Gold futures slip, ready for weekly loss,” Marketwatch, November 16, 2012; “PRECIOUS-Gold inches down; global economic uncertainty weighs,” Reuters, November 16, 2012; “PRECIOUS-Gold eases, heads for weekly loss,” Reuters, November 16, 2012;  “Euro zone double dips back into recession,” Marketwatch, November 15, 2012; “Paulson holds on to gold pile in third quarter,” Reuters, November 15, 2012; “PRECIOUS-Gold slips as weak euro zone data hurts stocks,” Reuters, November 15, 2012; “PRECIOUS METALS: Gold Rangebound in Asia, Looking for Catalysts,” Wall Street Journal, November 15, 2012; “Gold Falls on Concern Demand Slowing Amid Dollar Strength,” Bloomberg, November 15, 2012; “Gold to Gain to $2,000 on Money Printing, Deutsche Bank Says,” Bloomberg, November 14, 2012; “Greece, FOMC meet on Wed, US fiscal cliff to be catalysts for Gold: Sharps Pixley,” Commodity Online, November 14, 2012; “PRECIOUS METALS: Comex Gold Rises on Euro Gains, Demand Hopes,” Wall Street Journal, November 14, 2012; “Gold may be on track to test $1800 again: Saxo Bank,” Commodity Online, November 13, 2012; “LBMA meet forecasts gold at $1,843/oz by next Sept. -poll,” Reuters, November 13, 2012; “Is Gold No Longer a Safe Haven? CNBC, November 12, 2012; ; “Cashing In on the New Gold Rush,” Bloomberg, November 12, 2012; “Barrick Gold sees gold prices hitting $2,000/oz in 2013,” Reuters, November 12, 2012; “UPDATE 3-China seeks to open gold mkt further, Shanghai plans ETFs,” Reuters, November 12, 2012; “PRECIOUS-Gold near 3-week high; focus on US fiscal cliff,” Reuters, November 12, 2012; “China Lags U.S. in Gold Holdings, May Raise Total, LBMA Says,” Bloomberg, November 12, 2012; “Gold futures rise more than 3% for the week,” Marketwatch, November 9, 2012; “Gold couldn’t have asked for a better election outcome – UBS,” Financial Post, November 7, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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