FT surveys some fund managers about gold
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Submitted by cpowell on 09:33AM ET Sunday, December 6, 2009. Section:
Daily Dispatches 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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