Bloomberg News

Gold Eclipsed by Dollar Haven as Goldman Sees Rally

May 16, 2012

When gold reached its record Sept. 6, it was moving in tandem with the VIX as Europe’s debt crisis and mounting concern about the U.S. recovery spurred investors to buy the metal to diversify their assets. Photographer: Dhiraj Singh/Bloomberg

When gold reached its record Sept. 6, it was moving in tandem with the VIX as Europe’s debt crisis and mounting concern about the U.S. recovery spurred investors to buy the metal to diversify their assets. Photographer: Dhiraj Singh/Bloomberg

Investors are reducing gold holdings for a third month, the longest stretch since 2004, and favoring the dollar as a haven from Europe’s debt crisis, even as Goldman Sachs Group Inc. predicts record prices for the metal.

Bullion erased its gains for 2012 this week as the dollar rose against a basket of currencies for a record 12 straight days. Gold held in exchange-traded products fell 30.8 metric tons since reaching a record 2,410.2 tons on March 13, data compiled by Bloomberg show. Royal Bank of Scotland Plc, ABN Amro Bank NV and Barclays Plc cut their forecasts in May, though Goldman expects prices to rise 26 percent to $1,940 an ounce in 12 months.

Gold rallied for 11 consecutive years and prices rose more than sevenfold, with demand accelerating in 2008 amid the global recession. Now, mounting concern that Greece may exit the 17- nation euro and prospects for faster U.S. growth are boosting the dollar, making it more attractive than bullion to some investors seeking to protect their wealth. Hedge funds are the least bullish on the metal since December 2008.

“Gold is just another risk asset,” said Michael Aronstein, the president of Marketfield Asset Management in New York, who predicted the 2008 slump that drove commodities down 66 percent in seven months and then the rebound in 2009. “It made you a lot of money if you took the risk eight or 10 years ago. A real safe haven would be a pile of high-denomination Swiss franc or dollar notes, stored in a safety deposit box.”

Trading Partners

Futures dropped 1.9 percent this year to settle at $1,536.60 on the Comex today in New York. The Standard & Poor’s GSCI Index of 24 commodities declined 1.9 percent, and the MSCI All-World Index of equities climbed 1.7 percent. The Dollar Index, a gauge against six major trading partners, added 1.5 percent after retreating as much as 2.6 percent. Treasuries returned 1 percent, a Bank of America Corp. index shows.

Bullion slid as much as 21 percent from its intraday record in September, the common definition of a bear market. On a closing basis, futures need to settle at $1,513.52 an ounce to record a 20 percent drop from its August settlement peak of $1,891.90.

Gold’s correlation to the Chicago Board Options Exchange Volatility Index, a measure of U.S. equity derivatives known as the fear gauge, has now dropped to near zero after moving in lockstep as recently as September, when New York futures touched a record $1,923.70 before plunging 19 percent. The 30-week correlation coefficient between the greenback and bullion is now at -0.66, compared with -0.24 in September, with a figure of -1 meaning the two move opposite to each other.

Barclays, RBS

The metal will average $1,740 in 2012, compared with $1,673.76 so far this year, according to the median estimate of 11 analysts tracked by Bloomberg since March. Barclays cut its outlook by 8 percent to $1,716 last week and RBS lowered its forecast by $25 to $1,725 on May 4. ABN Amro said May 2 its prediction dropped to $1,550, from $1,600 in January.

The European Central Bank will be forced to pump more money into the euro region in response to the debt crisis, reviving the appeal of gold, Hussein Allidina, the head of commodity research at Morgan Stanley in New York, wrote in a report May 14. The ECB already flooded markets with more than 1 trillion euros ($1.28 trillion) to avert a credit crunch. Prices will rebound to an average of $1,825 this year and $2,175 in 2013, Morgan Stanley forecasts.

The Federal Reserve is likely to start a third round of stimulus in June, Goldman’s commodity research team, led by Jeffrey Currie in New York, wrote in a report May 9. The metal rose about 70 percent as the Fed bought $2.3 trillion of debt in two rounds of so-called quantitative easing ending in June 2011. It’s too early to say the dollar has reclaimed its status as the currency of last resort over gold, the team wrote.

Soros, Paulson

Billionaire investor George Soros raised his stake in the SPDR Gold Trust, the biggest exchange-traded product backed by bullion, according to a filing yesterday reflecting first- quarter holdings. Paulson & Co., the hedge fund founded by billionaire John Paulson, maintained its investment in the ETP last quarter, while Steven A. Cohen’s SAC Capital Advisors LP cut.

Record-low interest rates from the U.S. to Europe may prop up demand for gold, which generally earns investors returns only through price gains. The Fed has pledged to keep rates at “exceptionally low levels” at least through late 2014. Central banks are buying bullion at the fastest pace in five decades, adding 439.7 tons in 2011. They may purchase a similar amount this year, the London-based World Gold Council estimates.

VIX Correlation

When gold reached its record Sept. 6, it was moving in tandem with the VIX (VIX) as Europe’s debt crisis and mounting concern about the U.S. recovery spurred investors to buy the metal to diversify their assets. At the time, the metal’s correlation coefficient with the VIX surged to as high as 0.92. A reading of 1 indicates that the two securities trade in lockstep. The correlation is now less than 0.1 percent.

The Dollar Index gained for 12 sessions through May 15, the longest rally since its inception in 1973. The leadership vacuum in Greece and concern that the country would quit the common currency spurred investors to sell euros and buy dollars. That also diminished demand from investors who use gold to hedge against a weaker greenback. Open interest, or contracts outstanding, in U.S. futures dropped 18 percent since July, data compiled by Bloomberg show.

Holdings in ETPs backed by gold retreated 0.3 percent this month after dropping 0.7 percent during the previous two months, data compiled by Bloomberg show. In the second quarter, the VIX has surged more than 40 percent while gold has dropped 6.9 percent, poised for the biggest quarterly loss since June 2004.

Net-Longs

Hedge funds and other speculators are holding a net-long position of 92,498 futures and options, down from 253,653 contracts in August, Commodity Futures Trading Commission data show.

“Usually, gold could be viewed as a safe haven or a contra play to the U.S. dollar,” said Bill Greiner, who helps manage $13 billion of assets as chief investment officer at Mariner Wealth Advisors in Kansas City, Missouri. “It’s really doing neither right now. It’s highly possible that we’ll see gold and commodities in general continue to drift down until the Fed steps in with some sort of quantitative easing package.”

To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.


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