Barefoot Investor: Gold Seen Heading for Biggest Annual Gain in 32 Years on Flight to Safety

Gold may climb the most in more than three decades this year as investors and central banks boost their holdings on concern that global economic growth may stall amid a worsening sovereign-debt crisis in the U.S. and Europe.

Gold for immediate delivery may reach $2,000 an ounce by the yearend, extending this year’s gain to 41 percent, according to the median forecast in a Bloomberg survey of 13 traders and analysts at a conference in Kovalam in South India on Aug. 20. That would be the most since the 127 percent surge in 1979, according to Bloomberg data.

The metal is set for an 11th year of gains as holdings in exchange-traded products reached a record on Aug. 8 and central banks are adding to their reserves for the first time in a generation. George Soros, the billionaire investor, cut his holdings in the SPDR Gold Trust this year as prices rallied.

Gold for immediate delivery surged as much as 2.3 percent to a record $1,894.80 an ounce today and traded at $1,887.38 an ounce at 4:37 p.m. in Singapore. Prices gained 6 percent last week, the most since January 2009. Bullion for October delivery gained as much as 1 percent to an all-time high of 28,244 rupees ($616) per 10 grams on the Multi Commodity Exchange of India Ltd. and traded at 28,068 rupees at 2:24 p.m. in Mumbai.

Morgan Stanley

Morgan Stanley economists have cut forecasts for global growth this year and said the U.S. and Europe are “dangerously close to recession.” JPMorgan Chase & Co. said the U.S. economy may expand less than previously projected in the next two quarters as consumer sentiment drops and the housing market fails to gain momentum.

“Gold is the currency of the world at the moment, with the world convinced that the monetary and fiscal authorities are likely to do nothing right and everything wrong when it comes to resolving the world’s current fiscal problems,” Dennis Gartman, the economist who correctly forecast 2008’s commodities slump, said in his daily Gartman Letter on Aug. 19.

Bank of America Merrill Lynch raised its 12-month gold price target to $2,000 an ounce on the increased chance of a third round of so-called quantitative easing in the U.S., it said in a report dated Aug. 9.
Bernanke Speculation

Growing speculation that Federal Reserve Chairman Ben S. Bernanke will signal this week at a conference in Jackson Hole, Wyoming, that the Fed will increase monetary stimulus to boost the economy is prompting investors to buy gold, Edel Tully, an analyst at UBS AG in London, said in a report.

“Should Bernanke put a damper on QE3 expectations, the yellow metal could well experience the correction that potential investors have been impatiently awaiting,” she said.

About 60 percent of clients surveyed by UBS expect gold to be trading above $1,800 by the end of this year. The survey was conducted in the first two weeks of August, it said on Aug. 16.

“A developed world with slower growth, a large fiscal deficit and near zero rates over the next few years, inflationary pressures in emerging economies, and larger political and economic uncertainty bodes well for history’s oldest form of wealth,” Barclays Capital said on Aug. 18.
Soros, Mindich

Soros and Eric Mindich’s Eton Park Capital Management LP cut their holdings in the SPDR Gold Trust, the biggest ETP backed by gold, in the second quarter, while Paulson held on to his 31.5 million shares, a filing with the U.S. Securities and Exchange Commission showed Aug. 16.

Central banks added 155 tons valued at about $8.18 billion to reserves in the first five months of the year, according to the World Gold Council. Thailand, South Korea and Kazakhstan added gold valued at about $2.38 billion to their reserves. Thailand’s reserves rose to about 4.07 million ounces (126.6 tons) in June, from about 3.523 million ounces in May, according to the Bank of Thailand.

The Bank of Korea bought 25 tons over a one-month period from June to July, lifting reserves to 39.4 tons, the bank said. Kazakhstan’s holdings increased by 3.1 tons, according to data from the International Monetary Fund.
Central Banks

“Gold may rise to $2,000 or more by 2011-end if the global economy remains the same,” said Prithviraj Kothari, president of the Bombay Bullion Association. “Central banks are also buying gold, which is positive.”

Gold imports by India, the biggest consumer, may reach a record of as much as 1,000 tons this year as investors seek a haven against inflation and volatility in stock markets, Kothari said. Consumption rose to a record 963.1 tons last year, driving bullion imports to the highest ever at 958 tons, according to the gold council.

Purchases climbed to 267 tons in the three months ended June 30 from 167 tons a year earlier, as investment demand jumped 78 percent to 108.5 tons, the second-highest quarter on record, the council said on Aug. 18.

Gold may surge as high as $2,400 an ounce next year as the precious metal is still in the “middle of a bull run,” said Jeffrey Rhodes, chief executive officer at INTL Commodities LLC. Bullion may drop to as low as $1,725 an ounce as early as next month before rebounding, he said.

“It is definitely in a bubble territory and I don’t think the bubble will burst, but it will deflate a bit,” Rhodes told the gold conference. “Trees do not grow to heaven.”

GFMS is owned by Thomson Reuters Corp. and Bloomberg competes with Thomson Reuters in selling financial and legal information and trading systems. (Bloomberg)


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