What’s happening at the Mundial Agencia de Cambios in the historic center of the capital underscores the global rush from investors seeking refuge from debt and banking crises. Holdings in exchange-traded products backed by gold reached a record $113 billion July 29, data compiled by Bloomberg show. Rand Refinery Ltd., operating the world’s biggest refining complex east of Johannesburg, is selling the most Krugerrands in almost a year.
Purchases accelerated as Greece was bailed out for a second time, U.S. leaders wrangled over borrowing limits and the cost of insuring against bank defaults hit a six-month high. While George Soros sold most of his gold in the first quarter, a year after calling it the “ultimate asset bubble,” John Paulson, who made $15 billion betting against subprime mortgages, remains the biggest investor in the largest ETP backed by bullion.
“The top of the bubble will be euphoric action, a big accelerated price move, and that’s just not the case at the moment,” said Charles Morris, who oversees $2.5 billion at HSBC Global Asset Management in London. “I would expect it to be a very popular asset at its peak, and I don’t think we’re anywhere near that. We think it’s a bull market and we’re on it.”
Treasury Returns
Gold advanced 15 percent this year, beating the 7.4 percent gain in the Standard & Poor’s GSCI gauge of 24 commodities and the 0.8 percent rise in the MSCI All-Country World Index of stocks. Treasuries returned 4.2 percent, a Bank of America Merrill Lynch index shows. The metal for immediate delivery traded at $1,629.20 an ounce by 4:43 p.m. in London.Bullion, which reached a record $1,632.80 on July 29, will rise as high as $1,713 this year and $1,938 in 2012, according to the median in a survey of the four most-accurate precious- metals forecasters tracked by Bloomberg over the past two years. That may mean 12 consecutive annual gains, the longest winning streak since at least 1920.
Investors in options on Comex gold futures also expect the rally to continue. The most widely held option gives holders the right to buy gold at $2,000 by November, 22 percent more than now. The second-biggest position is $1,800 for the same month, data from the exchange shows. It was the most widely held option as of July 29. Speculators are holding close to their largest bet on higher prices since October 2009, according to figures from the U.S. Commodity Futures Trading Commission.
British Sovereigns
Rand Refinery sold about 66,400 ounces of Krugerrands last month, the most since August 2010. Britain’s Royal Mint used 36,219 ounces in the first half of 2011, 8.9 percent more than a year earlier, data obtained by Bloomberg under a Freedom of Information Act request show. Krugerrands and British pieces are among the coins Lola is finding hardest to replace.“People are nervous about the banking system and the euro and believe that investing in gold will help them protect their savings,” said Lola, who manages coin sales at the shop near the Rua do Ouro, once a center for goldsmiths working with metal brought back from Brazil in the 18th and 19th centuries.
“We used to have people, mostly older people and coin collectors, who came here to buy gold coins to offer them as gifts,” said the 32-year-old, who sold 643 ounces of coins in the first six months this year. “Today, we have people from all ages and walks of life buying.”
Central banks, the world’s biggest holders, are also accelerating purchases, adding 155 metric tons valued at about $8.1 billion to reserves in the first five months, according to the London-based World Gold Council. That’s about double the amount bought in all of 2010.
Borrowing Costs
The trend may also be a warning. Prices rose to a then- record $850 in 1980 as central banks bought gold, only to drop for most of the next 20 years. Bullion tripled from 1999 through the beginning of 2008 as the banks sold more than 4,000 tons.Higher borrowing costs also threaten the bull market. More than two-dozen countries and the European Central Bank raised interest and other rates this year as inflation accelerated, data compiled by Bloomberg show. That diminishes the appeal of gold, which earns investors returns through price gains.
Soros Fund Management LLC, founded by the 80-year-old billionaire, sold 99 percent of its stake in the SPDR Gold Trust and all shares in the iShares Gold Trust in the first quarter, a U.S. Securities and Exchange Commission filing in May showed.
Warren Buffett, with a net worth of $50 billion, says better returns can be found elsewhere. Berkshire Hathaway Inc.’s Class A shares rose more than 12-fold in the past two decades while gold is up more than fourfold.
‘A Little Peculiar’
“They take it out of the ground in South Africa, ship it to the Federal Reserve, where they put it back in the ground,” Buffett said in answer to a question about commodities on April 30 at Berkshire Hathaway’s annual meeting in Omaha, Nebraska. “If you were watching from Mars you might think it’s a little peculiar.”Bullion’s 14 percent advance since the end of the first quarter has favored investors who kept their bets.
Paulson & Co. remains the largest shareholder in the SPDR Gold Trust, the biggest exchange-traded product backed by gold, according to a filing with the SEC in May. He bought the 31.5 million shares in the first three months of 2009, valued at $2.84 billion at the end of the period. They are now valued at $5 billion.
Investors added 142 tons of gold to their holdings through exchange-traded products since the end of February, taking the total to 2,152 tons, data compiled by Bloomberg show. That’s more than all except four central banks.
Inflation Adjusted
ETP holdings will reach 2,404 tons this year and 2,754 tons in 2012, Morgan Stanley estimates. In inflation-adjusted terms, gold’s 1980 record of $850 is equal to $2,299 today, according to a calculator from the Federal Reserve Bank of Minneapolis.
“The reason people hold gold is as protection against what we call tail risk -- really, really bad outcomes,” Fed Chairman Ben S. Bernanke told a Congressional hearing on July 13. “And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”
The cost of insuring against European banks defaulting with credit-default swaps rose to 177 basis points on July 29, from 120 basis points in April, according to the Markit iTraxx Financial Index of contracts tied to senior debt of 25 banks and insurers. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower miss debt agreements. A basis point on a contract protecting $10 million of debt for five years is equivalent to $1,000 a year.
Mining Earnings
Speculators held a net 233,256 futures and options contracts by July 26, CFTC data show. They held 238,319 a week earlier. The last time the position was that high, gold rose 15 percent to a record in the following two months.
A measure of the combined earnings of the 16-member Philadelphia Stock Exchange Gold and Silver Index will rise 18 percent this year, according to analysts’ estimates compiled by Bloomberg. Toronto-based Barrick Gold Corp. (ABX), the world’s largest producer, will report a 42 percent jump in net income to $4.48 billion, the mean of 11 estimates shows.
The dollar, the world’s reserve currency, weakened 8 percent in the past year, sapping investor confidence already dented by the global recession.
The U.S. Dollar Index, a gauge against six counterparts, will average 74.3 in the fourth quarter, compared with an average of 76 so far this year, the median of 10 analysts’ estimates compiled by Bloomberg show. Gold and the index have a -0.75 correlation, with a figure of -1 meaning they move in opposite directions all the time.
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