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Despite Sean Boyd's help, gold's slumber still mystifies Bloomberg

Section: Daily Dispatches

Gold Trails Treasuries
as Dollar's Fall
Fails to Ignite Rally

By Pham-Duy Nguyen and Saijel Kishan
Bloomberg News Service
Monday, August 13, 2007

Gold is going nowhere.

Dollar-priced bullion, a traditional haven for investors in times of turmoil, is lagging behind U.S. Treasuries. The metal is stuck at about $673 an ounce in London, little changed for the week and up just 1.2 percent since July 16, when stocks started to tumble.

It should be the best of times for investors in the metal. The dollar has weakened 3.6 percent against the euro this year. The Federal Reserve says inflation remains the "predominant risk" to the economy. Commodity prices, as measured by the UBS Bloomberg CMCI index, are heading for a sixth straight annual gain. The supply of gold is falling for the third time in four years, and global stock investors lost as much as $2.66 trillion in the most volatile trading since 2003.

"It's a mystery," said Peter Schiff, chief executive officer of Darien, Connecticut-based brokerage Euro Pacific Capital, with $700 million in customer accounts. "These are ideal conditions for gold. The fact that gold hasn't risen means there's a lot of complacency out there. People aren't panicked yet."

Gold analysts are retreating. New York-based Citigroup Inc., the biggest U.S. bank, cut its 2007 forecast to $679 on average from $700. John Reade, the analyst at Zurich-based UBS AG who predicted last year that gold may approach its 1980 record of $850, now forecasts $670. Gold closed Aug. 10 at $672.80, up 5.7 percent since Dec. 31.

Investors' optimism is waning because central banks in Europe have increased sales of reserves this year by 7.3 percent, or 24.5 more tons valued at $581 million, data from the London-based World Gold Council show. The world's central banks are the biggest holders of gold, controlling about a fifth of all known supplies.

The European banks have sold 358 metric tons of the 500 tons permitted annually, compared with 333.5 tons through Aug. 11 last year, the council said. Banco de Espana has sold 149 metric tons in the current year, more than double the sales in the previous two, says London-based research firm GFMS Ltd.

"It certainly has been a source of frustration for gold investors," Sean Boyd, chief executive officer of Canadian gold producer Agnico-Eagle Mines Ltd., said on Aug. 3. "We've had some well-timed central bank sales that kept us away from the magic $700 number earlier this year."

Hedge-fund managers and other large speculators have pared bullish bets. Speculative long positions, or wagers prices will rise, dropped 34 percent in the week ended July 31, the most in two years, based on holdings of New York gold-futures contracts tracked by the U.S. Commodity Futures Trading Commission.

Rising global interest rates have made holding gold less attractive for foreign investors. While the Fed has kept rates unchanged at 5.25 percent since June 2006, the European Central Bank has raised rates twice this year to 4 percent and the Bank of England made four increases to 5.75 percent. Gold priced in euros is up 3 percent this year.

Gold investors say the last time they saw as many reasons to buy was in the 1970s, after Iran cut oil supplies, U.S. inflation rose to 12.8 percent, the Standard & Poor's 500 Index fell to a 12-year low and the economy sank into recession. Gold reached its record high of $850 an ounce on Jan. 21, 1980.

The top reason investors buy gold is to hedge against falling U.S. assets, said Martin Murenbeeld, chief economist at DundeeWealth Inc. in Toronto. The firm manages $27 billion in mutual funds.

Gold jumped 23 percent last year, the sixth straight annual gain, as the dollar fell 11 percent against the euro. The dollar is down against all 16 of the world's most-traded currencies in the past six months, according to data compiled by Bloomberg.

Falling gold supplies are another motive to buy, says Agnico-Eagle's Boyd, who sees prices reaching $850 in 18 months. Output from mines, recycled metal and sales by central banks and speculators fell 2 percent in the first quarter to 808 tons from a year earlier and declined 22 percent from the first quarter of 2005, according to the London-based World Gold Council.

Still, investors haven't turned to gold as an alternative asset as stocks declined the past four weeks.

The S&P 500 has fallen 6.2 percent since July 16, including a 3 percent drop on Aug. 9, as concern mounted that losses in U.S. subprime mortgages may hurt economic growth and earnings. Central banks in the U.S., Europe, Japan, Australia, and Canada added about $136 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets.

"All these credit problems and bailouts are inflationary and creating dollars," Euro Pacific Capital's Schiff said. "I'm expecting an explosive move for gold any day now."

Yet as stocks fell, the return on 10-year Treasuries since July 16 was 1.5 percent, outpacing gold, according to data compiled by Merrill Lynch & Co. The bonds, which carry the highest debt rating and are backed by the government, provide a fixed return. Gold doesn't.

"In times of a liquidity crunch, people want cash, and that's Treasuries, not speculative stuff like gold," said Ron Goodis, who has been trading gold since 1978 and is director of futures trading at Equidex Brokerage Group in Closter, New Jersey.

Inflation isn't as much of a basis for buying gold now, said Eugen Weinberg, senior commodities analyst at Commerzbank AG in Frankfurt.

"If we see inflation rates rising to 5 percent and beyond, there will be a case to buy gold, but we are not there yet," Weinberg said.

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