Last Updated : 29 July 2011 at 12:35 IST
Why the big gold spike is yet to come
Fund managers often shy away from gold. They believe it is better to invest in “productive assets” rather than gold.
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NEW YORK (Commodity Online): Fund managers often shy away from gold. They believe it is better to invest in “productive assets” rather than gold.
Would you rather have a 67-foot gold cube made of all the bullion in the world, or all the farmland in the US, ten Exxon Mobils and $1 trillion in walking around money? - Warren Buffet
His point being that Gold is not a productive asset. It just sits. Its value is entirely dependent on the whims of buyers.
However, things are changing. As the world economic outlook grows weaker and weaker; the drive for these funds becomes not capital appreciation but capital preservation.
“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can’t print any more of” said Kyle Bass, the well-known Hayman Capital hedge fund manager
Institutions and Large managed funds keep about 1% of their total assets in gold. But “If these colossal funds start getting the idea that holding 5% of their portfolio in gold is more conservative and intelligent than holding the current average of 1%, what will this mean for gold demand? The answer is obvious and the ramifications huge” says Ron Fricke, President of Regal Assets.
If these endowments and private foundations were to increase their conservative gold holdings from 1% to a mere 5%, there would be a requirement of over 1000MT of gold. That is more than 200% of China’s yearly production!
According to a report from the Gold Council, the total supply for gold in 2010 was 4155 tonnes. An additional 1000 tonne demand would obviously skyrocket the prices and send the markets into a buying frenzy.
The University of Texas, the second largest endowment fund in the US, added about half of a billion dollars worth of gold to its portfolio in May, on top of the half-billion it purchased several months prior. Is this an indication of things to come?
“Basically you have a very orderly rate of increase. If you go back to 1979 gold doubled in a single year, well it hasn’t doubled in any year in the last ten years. So as this move is ending it’s conceivable to me that you are going to see a doubling of the gold price from some higher level, but I feel very good about the sustainability of the current action in the gold price” said John Hathaway the prolific manager of the Tocqueville Gold Fund on King World News.
“Gold is up (roughly) 13% year to date, if you tack on another 10% in the second half that is not unsustainable in terms of the macro picture that I see. What’s going to drive it (gold) crazy is when institutional buying starts to take place, and we really haven’t seen that (accelerated) sovereign wealth and (accelerated) central bank buying. That still lies out there and that’s the fuel that’s going to get the gold price up to numbers that I’m almost afraid to mention on air or in print.” He went on to add.
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