February 20, 2009 6:15 pm
Gold prices rose above the $1,000 a troy ounce mark on Friday as investors shunned risky assets for the relative safety of bullion amid renewed fears about the health of the global financial system.
“Gold investors hear ‘trillions and trillions’ and ‘bail-out after bail-out’ and look at gold as the only asset which remains good for capital preservation,” said Tom Pawlicki of MF Global, the commodities broker in Chicago.
In London, spot gold jumped to $1,005.40 an ounce, sharply higher from New York’s last quote on Thursday of $973.85, and the highest level since March 2008.
Gold is trading less than 3 per cent below its all-time high of $1,030.80 set last March.
Bullion has reached new record highs when priced in a range of currencies, including sterling, the euro, the Australian and Canadian dollars and the Indian rupee.
Alan Ruskin of the Royal Bank of Scotland said that unlike last year, the run-up in gold was much less a direct consequence of the US dollar weakness than “a general flight from paper currencies”.
Suki Copper of Barclays Capital said: ”Last year, we saw a switch into physical gold from paper gold futures following the growing concerns over counterparty risk as investors wanted the safety of a hard asset. However, in this recent rally, we have not seen that same discrimination so along with strong demand for coins and bars, we’ve also seen renewed buying interest in gold futures as well as the huge inflows into ETFs.”
Holdings in the SPDR Gold Trust, the world’s largest gold-backed ETF, rose to 1,028.98 tonnes on Thursday, elevating it to the world’s seventh-largest holder, behind a handful of central banks.
SPDR holdings have risen 248.75 tonnes so far this year, absorbing about 10.5 per cent of the world’s annual gold mine output.
Ms Copper said: “The speed of the inflows into ETFs really has been remarkable this month. Total ETF holdings have jumped by 201 tonnes in February alone which is a record inflow - almost double the inflows of the previous record.”
Michael Jansen, metals analyst at JPMorgan, said that if the pace of buying from the ETF community and from physical bars and coins hoarders was sustained, then the illiquidity in the gold market would be the “tinderbox” that allows the parabolic move that some seek, or fear.
“A $1,200 to 1,300 an ounce target for gold is not unreasonable over the next three to six months,” said Mr Jansen.
Michael Lewis, commodity strategist at Deutsche Bank, said gold’s rally would continue to reflect the worsening economic outlook.
“The surge in investment flows into gold ETFs exposes gold [prices] to the ebb and flow of investor sentiment and consequently introduces an additional level of volatility risk into the market,” said Mr Lewis.
Retail investors and wealthy individuals are purchasing large quantities of gold coins, a move seen as the strongest signal of safe-haven buying by the industry.
Sales of South Africa’s Krugerrand, the world’s most popular bullion coin, are running 10 times higher than this time last year, with investors buying about 20,000 ounces a week, according to Johan Botha, head of precious metals sales at the Rand Refinery in Germiston, on the outskirts of Johannesburg.
“As long as there is a lack of confidence in the banking system, investors would rather look at physical investment such as gold,” Mr Botha told the Financial Times.
The Rand Refinery doubled its maximum production capacity last month to 20,000 ounces from 10,000 ounces.
“We are operating at maximum capacity,” said Mr Botha who also that that if the refinery was able to produce more gold coins, demand was strong enough to absorb the increased output.
The surge in gold investment contrasts with a lack of demand from the jewellery sector, traditionally the backbone of global consumption.
India, the world’s largest consumer, has not imported gold so far this year as high prices have detered buyers and led to a surge in scrap supplies returning to the market.
The weakness of the jewellery market has prompted fears of a pull-back in prices if the momentum in investment buying slows.
Deutsche Bank also cautioned that the threat of deflation in the US was bearish for the gold price as it would imply a significant rise in real interest rates around the world, an environment that has historically proved problematic for gold returns.
The World Gold Council reported a 4 per cent increase in global gold demand in 2008, driven by a 64 per cent jump in investment. In its latest Gold Demand Trends report released earlier this week, the industry sponsored body noted that jewellery demand fell 11 per cent while industrial consumption dropped 7 per cent last year..
Supply was 1 per cent lower in 2008 than the previous year, with a 3 per cent drop in mine production and a 42 per cent plunge in official sector sales, mostly from central banks. Supplies from scrap surged 17 per cent.
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