Gold has shot up to a fresh nominal record of $1,680/oz following this week’s interventions by the Swiss National Bank and Bank of Japan to quell appreciation of their currencies. “Up to now, both the Swiss franc and the Japanese yen have been regarded as safe havens. If they lose this status, only gold would remain, and the interest in gold should increase further,” Commerzbank writes in a report today.
Gold’s popularity as a liquid tradable instrument demonstrates that many see it as just another currency – indeed, gold trading desks often sit alongside the currency trading desk at many banks.
“Gold and silver are trading very much like currencies at the moment,” says the head of metals trading at a large European bank. “People just don't trust what’s going on at government and central-bank level any more. Many banks are offering gold on their currency spot desks, since positions are very easy to roll, like currency forwards.”
Accessing the gold market has become much easier since 2005, when the first gold exchange-traded funds were launched. Before that, buying was focused on 100oz gold futures on Nymex’s Comex division. Now, the 60 or so major gold funds tradable on exchange cater for investors of all sizes.
The cleared futures market in gold is evolving too. Several Indian exchanges and the Hong Kong Mercantile Exchange – operated by India’s Financial Technologies Group – offer contracts sized to attract retail customers. HKMex is even planning to launch the world’s first renminbi-denominated gold contract in the coming months.
The popularity of physically backed ETFs is such that gold now rallies whether the dollar is rising or falling, say Deutsche Bank analysts. Specialist firms handle storage costs, meaning that the vast majority of gold investors will never touch an ounce of the metal.
SPDR, State Street’s ETF unit, manages GLD, the world’s largest gold ETF. As of August 2’s London fixing price, the fund’s 41.2 million ounces of gold holdings were valued at $67.5 trillion. One share is roughly equivalent to one-tenth of an ounce of gold. The fund’s net holdings have jumped 1.4% to 1,263.6 tonnes – close to its record high of 1,320.4 tonnes last June.
Holdings data for GLD offer an insight into investor appetite. Paulson & Co, the world’s third-largest hedge-fund manager, holds 31 million GLD shares, according to the latest filings – 7.5% of the outstanding and more than twice as much as the next holder, Northern Trust. JPMorgan is the largest GLD holder among banks, with 11.7 million shares. It is also the most active buyer among banks, recently adding 2.4 million shares to its holding.
The latest research from Barclays Capital suggests that gold inflows to exchange-traded products are at record levels. Some 86 tonnes were added by all exchange-traded products during July, according to preliminary filings. Silver ETPs saw a net inflow of 569 tonnes for the month, the highest since November.
| Tracking inflows into gold ETF's during periods of risk aversion |
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| Source: Deutsche Bank, Bloomberg Finance L.P |
Not all leveraged fund managers are convinced of gold’s sustainability, however. George Soros’s Quantum fund sold most of its gold holdings in May, when the spot price peaked at $1,516. Soros reportedly bought mining stocks instead, according to the Daily Telegraph newspaper. Investment buying as a whole accounts for an increasingly large proportion of the gold market, however. Investors now represent just over 40% of total gold demand, according to Deutsche Bank research. No other commodity has such a high participation by investors relative to physical demand. “Physical demand is still pretty quiet,” says Robin Bhar, senior metals analyst at Calyon. “It’s all investment buying at the moment.”
Historically, the negative carry associated with holding gold has been high, since gold offers no yield. With real yields on most G10 currencies now negative, however, this is no longer much of a concern. Capital protection is holding sway over negative yield.
“Many central banks are diversifying away from currencies. Korea, Mexico, Thailand and even Russia are quietly building up [gold] stocks,” says Bhar. “What more testimony do you need? Even the central banks are resigned to a world of currency debasement.”
Barclays Capital reports that from June to July, the Bank of Korea bought 25 tonnes of gold, having not bought any in the preceding decade. Turkey also upped its buying to 10.5 tonnes in July, up from 3.6 tonnes in June. The market as a whole need only buy another 60 tonnes to reach 190 tonnes for the year, making 2011 a record year for buying gold.
Traders report strong physical buying in Spain and Portugal, too, as concerns about the European Financial Stability Facility’s ability to cope with a bigger sovereign default. There’s even talk of institutional buying in Utah, where a law was passed in May allowing gold and silver to be used as common currency.
How long are the gold rally’s legs? The consensus points only one way. “Gold has fooled the market twice already in the past few weeks,” says Ed Tully, gold strategist at UBS. “People expected a dip after the Greek bailout, and then again after the US debt deal, but pullbacks have been brief and shallow.”
Picking targets is therefore difficult – the resistance level last month was $1,550/oz. UBS this morning (Thursday) upped its one-month target to $1,725 (from $1,575) and its three-month to $1,850 (from $1,600). Deutsche Bank has long argued that, with no credible long-term US deficit reduction plan likely until after next year’s presidential election, gold can pass $2,000 without being considered a bubble.
Assuming real interest rates remain unchanged, Deutsche concludes, gold is likely to move above $2,000/oz in the third quarter of next year.