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Gold Rallying to $1,500 as Soros’s Bubble Inflates
By Nicholas Larkin, August 31, 2010, 9:30 AM EDT
(Adds latest forecasts in fourth-to-last paragraph.)
Aug. 31 (Bloomberg) -- Investors are accumulating enough bullion to fill Switzerland’s vaults twice over as gold’s most-accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.
Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 an ounce by December, or 18 percent more than the record $1,266.50 reached June 21. Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tons, within 0.1 percent of the all-time high.
“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. “A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”
Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 percent on Aug. 24 and the yen reached a 15-year high against the dollar the same day. Pacific Investment Management Co., Deutsche Bank AG and Citigroup Inc. have announced or are offering funds or traded instruments designed to guard against sudden market declines.
Swiss Reserves
Buyers accumulated almost 278 tons of gold in 2010 across 10 ETPs tracked by Bloomberg, worth $10.4 billion at this year’s average price. Total holdings are almost twice Switzerland’s official reserves of 1,040 tons, data compiled by the World Gold Council show. ETP holdings reached a record 2,078 tons July 19, data compiled by Bloomberg show.
One of the biggest buyers has been Soros Fund Management LLC, which oversees about $25 billion. George Soros, who made $1 billion breaking the Bank of England’s defense of the pound in 1992, described gold as “the ultimate asset bubble” at the World Economic Forum’s January meeting in Davos, Switzerland. Buying at the start of a bubble is “rational,” he said.
Soros Fund Management sold 341,250 shares of the SPDR Gold Trust, the largest ETP backed by bullion, in the second quarter, according to an Aug. 16 Securities and Exchange Commission filing. That still left a holding of 5.24 million shares, equal to almost 16 tons. Soros declined to comment on the change, through a spokesman.
Accurate Forecasters
Gold may rise as high as $1,500 next year, 21 percent more than the $1,240 traded at 1:45 p.m. in London, according to the median in a Bloomberg survey of 29 analysts, traders and investors. Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, says the metal may reach $1,550.
Bullion gained 13 percent since January, beating an 8.4 percent return on Treasuries, an 8 percent decline in the MSCI World Index of shares and the 10 percent slump in the S&P GSCI Total Return Index of 24 raw materials.
Investors are concerned the recovery is weakening. Sales of new U.S. homes fell to an all-time low in July, the Commerce Department said Aug. 25. The U.S. economy grew at a 1.6 percent annual rate in the second quarter, less than previously calculated, the department said Aug. 27. U.S. growth will slow to 2.8 percent next year, compared with 3 percent in 2010, according to the median of as many as 69 economists’ forecasts compiled by Bloomberg.
‘Fear Another Crisis’
People “fear another crisis and so they will diversify into gold,” said Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart, Germany, who was also the most- accurate forecaster in the first quarter. He expects gold to trade as high as $1,350 next year. Anne-Laure Tremblay, an analyst at BNP Paribas SA in London whose forecast was also the best in the period, is estimating a 2011 high of $1,370.
Bullion’s four-fold rally since the end of 2000 has attracted fund managers Eric Mindich and John Paulson. Mindich’s $13 billion Eton Park Capital Management LP bought almost 6.58 million shares of the SPDR Gold Trust in the second quarter, according to an Aug. 16 SEC filing. That’s equal to about 20 tons of gold. Paulson & Co., managing $31 billion, held 31.5 million shares in the SPDR Gold Trust, making it the largest investor, an Aug. 16 SEC filing shows.
Astor Sells
Astor Asset Management LLC, with about $570 million of assets, once had as much as 10 percent of its holdings in the SPDR Gold Trust, according to Bryan Novak, managing director of the Chicago-based company. The firm sold the stake at the end of last year for a profit and now owns silver, copper and a multicommodity ETP.
“We don’t believe we’re heading into a double-dip recession,” Novak said. “Gold carries some risk because a lot of people are piling into the trade.”
A plunge in equities may spur investors to sell their gold holdings to raise cash, he said. The Standard & Poor’s 500 Index dropped 14 percent since this year’s peak on April 26.
Investment demand of 1,901 tons last year exceeded jewelry consumption of 1,759 tons for the first time in three decades, according to London-based researcher GFMS Ltd. That trend continued into the second quarter, with total demand advancing 36 percent to 1,050.3 tons, the WGC in London said Aug. 25.
Newmont Mining
Earnings at Newmont Mining Corp., the largest U.S. gold producer, may increase 47 percent to $1.93 billion in 2010, according to the mean estimate of seven analysts’ forecasts compiled by Bloomberg. The 16-member Philadelphia Stock Exchange Gold and Silver Index advanced 8.7 percent since January.
Bets on gold may pay off even if economic recoveries strengthen. World growth will be 4.6 percent this year, the most since 2007, the International Monetary Fund said July 7. China, the second-biggest bullion buyer after India, will expand 10 percent in 2010, compared with 9.1 percent last year, according to the median of 24 economists’ forecasts compiled by Bloomberg.
Gold imports by India this year may total 600 tons to 625 tons, compared with an estimated 480 tons to 485 tons last year, according to Anjani Sinha, chief executive officer of National Spot Exchange Ltd., the country’s biggest bourse for trading physical gold.
While growth may curb investors’ appetite for gold to protect their wealth, it may also bolster purchases of jewelry, reviving demand that fell to a 21-year low in 2009, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich and the best forecaster in the last three quarters. He’s predicting a 2011 high of $1,350.
More Bullish
Analysts are getting more bullish. Their median estimate for next year’s average gold price climbed 6.2 percent since June 16 to $1,247.50, according to 17 forecasts compiled by Bloomberg. That compares with a 2.6 percent gain in silver forecasts, 0.6 percent advance in platinum predictions and a 0.5 percent jump in their palladium outlook.
Gold averaged $1,166.43 since January, heading for a ninth consecutive year of higher average prices. That’s the longest streak since at least 1920.
Options traders are also betting on prices rallying. The biggest position is in call options expiring in November 2010, giving traders the right to buy the metal at $1,500 by then. The next biggest position is the call option for $2,000 expiring in November 2011, data from the Comex exchange in New York show.
“Investors’ interest is still growing and still hasn’t reached a reasonable part of their portfolio,” UniCredit’s Hitzfeld said. “Gold is still an under-owned asset, that’s perfectly clear.”
NEW YORK (TheStreet ) -- Gold prices shrugged off earlier losses and rallied Tuesday as investors bought gold as a safe- haven asset ahead of Friday's jobs number.
Gold for December delivery settled up $11.10 to $1,250.30 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Tuesday has traded as high as $1,251 and as low as $1,233.50. The U.S. dollar index was lower by 0.14% at $83.02 while the euro was up 0.25% at $1.27 vs. the dollar. The spot gold price Tuesday was rallying $12, according to Kitco's gold index.
Gold prices had been selling off in early-morning trading Tuesday, but investors changed their tune to buy gold at "discount" prices as a safe-haven asset. Volume also picked up as momentum built, at 91,000 for the December futures contract on the Comex.
Despite prices settling near its record high at $1,250 an ounce, there still could be a correction. High gold prices could curb physical demand from India in September, traditionally a strong gold jewelry buying period, which could squash gold's rally.
Gold could also be subject to short-term profit taking. Prices have rallied 4% in August while the Dow Jones Industrial Average lost 4.3%, which makes the precious metal a prime target for investors looking to book profits.
In general, investors appeared hesitant to take new long positions before the long Labor Day weekend in the U.S. as the general mood in world markets turned fairly pessimistic. Japan's Nikkei index fell almost 326 points as global economic fears persisted and the yen continued its ascent. Investors were just as skeptical looking toward this week's flurry of U.S. economic data.
"I think we're in a case of bad news is good news for gold for the moment," Jeffrey Friedman, senior market strategist at Lind-Waldock. "I'm a buyer of dips ... the trend is still up ... the range is probably $1,225 to $1,242 [an ounce]."
For the long term, many analysts are still bullish on gold despite its 10-year rally. A new data report by Bloomberg showed that analysts expect the December contract for gold to rise, on average, to $1,500 in 2011.
But gold prices will have to get through Friday's U.S. jobs number to break out either to the upside or downside. The unemployment report is overshadowing all markets right now, including gold. A disappointing number might force investors to sell gold for cash but might also trigger another wave of safe-haven buying.
By Allen Sykora
(8-31-10, Kitco News)-- “It is probably only a question of time” before gold returns to the record highs from June, says a research note from Commerzbank.
For starters, the festival season has begun in the key consuming nation of India, during which time gold is traditionally given as gifts.
“Secondly, the debt crisis in Europe has returned to the focus of market players again,” Commerzbank says. The bond and other markets are pricing in a “higher default probability for Greek government bonds and an even greater probability of the rescue action for Greece failing,” Commerzbank says. “Given this news, gold should remain in strong demand as a ‘safe haven,’ even if the gold holdings of the SPDR Gold Trust have stagnated lately.”
By Rita Nazareth and Lynn Thomasson
Aug. 30 (Bloomberg) -- Meyer Shields says earnings at Warren Buffett’s Berkshire Hathaway Inc. will increase the most since 2006 this year. He’s also telling investors to sell the shares because the economic recovery is weakening.
The Stifel Nicolaus & Co. analyst has plenty of company. For the first time since at least 1997, fewer than 29 percent of ratings for stocks covered by brokerages worldwide are “buys,” according to 159,919 recommendations compiled by Bloomberg. Analysts are turning more pessimistic even as they push up estimates for profit growth among Standard & Poor’s 500 Index companies to 36 percent, the highest since 1988.
“People are sitting on a fence,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “When I go and talk to our equity analysts, they look at the companies and say, ‘Boy these companies look pretty good, earnings are OK, they have plenty of cash. What if there’s a double dip?’”
Conflicting announcements two minutes apart by Intel Corp. and Federal Reserve Chairman Ben S. Bernanke last week underscore the challenges facing analysts and investors even as stocks trade at a lower price relative to estimated earnings than almost any time on record. Intel cut its third-quarter revenue forecast, citing weaker-than-expected consumer demand. Bernanke said the central bank “will do all that it can” to safeguard the recovery.
Stand Still
More than 54 percent of ratings for companies in the U.S., U.K., Japan and Brazil are “holds,” the highest level since Bloomberg began tracking the data in 1997. While the proportion of “sell” ratings in the U.S. has fallen to 5.1 percent, half the level of 2003, the total combined with “holds” reached a record 71 percent last month, the data show.
“A ‘neutral’ usually means historically a ‘sell,’” said Kevin Rendino, a money manager at New York-based BlackRock Inc., which oversees about $3.2 trillion. “Ratings chase stock prices. When everyone becomes risk averse, they don’t want to stick their necks out.”
While pessimism is increasing, analysts say profits for companies in the MSCI World Index of 24 developed nations will gain 28 percent in the next year. The MSCI index trades at 11.5 times forecast earnings, data compiled by Bloomberg show. Except for the six months starting October 2008, the index has never traded below 12.5 times reported earnings.
Topping Estimates
Trading on Aug. 27 illustrated the mixed messages facing investors this year.
Stock-index futures jumped at 8:30 a.m. when the Commerce Department revised its second-quarter economic growth estimate to a 1.6 percent annual pace, below the initial assessment of 2.4 percent reported last month, yet beating the 1.4 percent median forecast from a Bloomberg survey of 81 economists. The market opened higher, with the S&P 500 advancing 0.2 percent.
The gains were erased just before 10 a.m. when Intel said consumers were curtailing computer purchases. Two minutes later, Bernanke sparked a 1.7 percent rally in the S&P 500 by predicting an improving economy in 2011.
“This market has been whipsawing us back and forth,” said Mike Ryan, the New York-based head of wealth management research for the Americas at UBS Financial Services Inc., which oversees about $641 billion. “People are interpreting each and every data point either for validation or for repudiation of the view they hold.”
Economic Surprise
Gains on Aug. 27 trimmed the S&P 500’s weekly decline to 0.7 percent, closing at 1,064.59. The gauge fell 1.5 percent to 1,048.92 at 4 p.m. in New York.
The benchmark gauge for U.S. equities is down 4.5 percent in 2010 after Europe’s debt crisis wiped out an increase of as much as 9.2 percent. Citigroup’s Economic Surprise Index showing how much U.S. economic data is differing from forecasts fell to minus 64 on Aug. 25, the lowest since January 2009.
Analysts from Stifel’s Shields to Oppenheimer & Co.’s Rick Schafer and Anthony Gallo at Wells Fargo Securities LLC are advising clients against buying shares of Berkshire, Intel and C.H. Robinson Worldwide Inc. even after boosting profit forecasts.
Shields says his biggest concern is that joblessness will weaken consumer spending, which accounts for 70 percent of the American economy. The unemployment rate held at 9.5 percent for a second month in July and has fallen less than a percentage point from the 26-year high of 10.1 percent last year, according to the Labor Department in Washington.
‘Much Worse’
“It’s negativity on the economy and therefore the ‘sell’ rating on Berkshire,” Shields said in an interview from Baltimore. “Employment is much worse than what people have anticipated. That uncertainty is contributing to weaker-than- desired employment and if I had to pick one single factor that underlies our negativity, that’s what it is.”
Shields forecast on Aug. 9 that Omaha, Nebraska-based Berkshire will earn $6,381 a share for all of 2010, an increase from his previous estimate of $5,866. The company’s Class A shares, which carry greater voting rights, have rallied 19 percent to $118,100 this year. The Class B stock of the firm, whose holdings in railroads, insurers and newspapers make it a proxy for the U.S. economy, rose 20 percent to $78.78 in 2010.
E. William Stone, chief investment strategist at PNC Wealth Management in Philadelphia, says rising “hold” and “sell” recommendations are bullish because it means investors can find bargains and wait for analysts to change their minds. He favors shares of technology makers and industrial companies.
‘A Little Nervous’
“Everybody is a little nervous to go out on the edge,” said Stone, whose firm oversees $103 billion. “That’s a positive. It gives the opportunity to either buy stuff that should be somewhere else. Maybe it’s a good company that’s being dragged down by the overall market.”
Profits for companies in the S&P 500 are forecast to reach $83.34 a share in 2010 and climb 22 percent in the next 12 months to a record $92.15 a share. Even slowing economic growth wouldn’t mean a stock-market crash, according to Laszlo Birinyi of Birinyi Associates Inc., which cut its year-end estimate for the S&P 500 to 1,225 from 1,325 on Aug. 25.
“While joblessness continues and the economy sputters, we would not necessarily ignore, but would instead downplay the vocal economists who believe another recession is upcoming,” the firm wrote. “There is a significant difference between the stock market and the economy. While both might be housed in the same building, they live on different floors.”
Bad Debt
Higher earnings don’t always make shares attractive to investors. At American Express Co., improving profits reflect the reversal of previous bad-debt reserves rather than a revival in consumer spending, said Jason Arnold, an analyst at RBC Capital Markets. He raised his 2010 earnings estimate for the New York-based company to $2.89 a share from $2.54 a share on Aug. 1.
“The estimate increase doesn’t reflect our outlook for a dramatic improvement in fundamentals,” Arnold said in an interview from San Francisco. Earnings are growing “not because they are seeing a tremendous pick-up in core performance, but because they are releasing credit reserves and are cutting expenses. It’s been more of a sugar high,” he said.
The likelihood that Intel’s profit margins will narrow should keep investors from buying the stock, according to Schafer at Oppenheimer. The Denver-based analyst boosted his 2010 profit projection by 12 percent and raised his 2011 forecast by 13 percent on July 14, while telling clients to hold the shares.
‘Peak Earnings’
“I’m no macroeconomist, but you’re certainly seeing data that suggests that things are slowing down,” Schafer said in an interview Aug. 26, the day before Intel lowered its sales forecast. “We’re underweight semis as a sector. We have seen peak earnings and most likely peak gross margins for this particular cycle.”
Schafer cut his 2010 and 2011 earnings estimates by 12 percent and 30 percent following Intel’s Aug. 27 announcement. The outlook from the Santa Clara, California-based company, whose chips run more than 80 percent of the world’s PCs, adds to evidence that the U.S. economic recovery is losing steam.
Wells Fargo analyst Anthony Gallo raised his 2010 profit forecast for C.H. Robinson last month and kept the “market perform” rating he has had since February. The Baltimore-based analyst said the transportation services company had earnings growth even as margins contract. He sees the shares as “fairly valued” given the economic uncertainties.
‘Hard to Envision’
“A catalyst on the horizon? It’s hard to envision one right now,” Gallo said in an interview. “We’ve seen a moderation in the rate of growth. We expect that to continue into the end of the year.” While expense cuts could help the Eden Prairie, Minnesota-based company, “it’s hard to see how that would be enough to continue to push estimates higher.”
The possibility revenue will disappoint investors is reason to sell shares of Dallas-based Texas Instruments Inc., said Daniel A. Berenbaum, who covers the stock for Auriga USA LLC, a New York-based research and trading company owned by Spanish investment firm Auriga Securities S.V. Sales at the second- largest U.S. chipmaker will surge 34 percent this year, rise 3 percent in 2011 and slump 1 percent in 2012, based on analysts’ estimates tracked by Bloomberg.
“The higher it goes now, the lower it could potentially go in the future,” said Berenbaum, who boosted his sales and earnings estimates for the technology maker last month. “I’m not inclined to raise my ‘sell’ rating.”
Lockstep
Wall Street firms are becoming more reluctant to award “buy” ratings because U.S. stocks are moving in lockstep with the S&P 500, limiting the opportunity for analysts to identify relative value, said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC.
The correlation between the U.S. equity benchmark and its individual members was 0.81 in the 50 trading days through July 7 and has since remained close to that level, Birinyi data show. That’s almost twice the historical average of 0.45 from the past 30 years. A higher number means moves in individual stocks are increasingly related to the direction of the index as a whole and not on their own earnings prospects or valuation, the Westport, Connecticut-based research firm said.
“There’s a high amount of uncertainty,” said Newark, New Jersey-based Praveen, whose firm oversees $690 billion. “Analysts are trying not to stick out their necks. They are probably not really sure about how the economy is going to play out over the next couple of months. They are using that as an excuse to play it safe.”
