Monday, November 29, 1999

Euro debt fears, ETF drive change in gold buying

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A climate of uncertainty fed by debt and currency crises is driving investors to take refuge in gold, raising prospects that investment demand for the precious metal will outstrip that from jewellery in 2010.Gold's use in jewellery has long been a key factor in determing its price, but analysts say investment could take centre stage this year as investors' faith in the euro is eroded by growing anxiety over contagion from the debt crisis in Greece.Buying by investors via gold-backed exchange-traded funds sent gold to a lifetime high near $1,250 an ounce this month despite a lack of demand from jewellers, which highlights a structural change in the bullion market, analysts say.And bullion prices could keep rising analysts say, with more and more raising forecasts towards $1,500 or higher as worries about the integrity of paper money and the strength of sovereign debtors drive investors into the ancient store of wealth.On May 12 alone, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust , jumped around 17 tonnes -- worth nearly $700 million -- as investors sought safety from Greece's debt crisis."ETF is the key to why gold is rising strongly," said Darren Heathcote, head of trading at Investec Australia in Sydney."The rise of the ETFs in terms of their importance, in terms of the volume, has been reasonably consistent since their inception. I don't see any reason why that would change."Until 2008, about 60 percent of global consumption for gold went into jewellery, 25 percent to investment and the rest to industries. But in 2009, investment swelled to 37 percent while jewellery demand slipped to just over 50 percent after gold first struck a record in December at above $1,220.Analysts expect demand for investment to expand further this year, utilising ETFs that track an index, commodity or basket of assets but trade like a stock, and allow investors to gain exposure to gold prices without taking delivery of the metal.Record holdings of the New York-listed SPDR Gold Trust speak volumes about the growing appetite for hard assets because of worries a $1 trillion European rescue to resolve the euro zone debt crisis could hurt rather than help the region's recovery.During the near 1,000-point plunge in the Dow Jones industrial average in early May, gold ETFs saw net inflows of $1.1 billion, says TrimTabs Investment Research, as risk-averse investors flocked to bullion as a store of value.The SPDR ETF is the world's sixth largest holder of gold, ahead of Switzerland, China and Japan.For a graphic of SPDR gold holdings flows, click http://graphics.thomsonreuters.com/10/GLD_SPDRVL0510.gifFor a graphic of the timeline of gold's rise to record highs, click http://graphics.thomsonreuters.com/10/GLD_TMLN.htmlSTILL OFF INFLATION-ADJUSTED ALL-TIME HIGH"It is worth noting that, adjusted for inflation, gold is still some way off its all-time high of $850 an ounce in 1980, which would be over $2,200 in today's terms," said Richard Davis, fund manager within BlackRock's Natural Resources team."Further market uncertainty would also help drive prices higher. This continued investment demand could support gold prices over the medium term."At around 1,200 tonnes, SPDR Gold Trust's holdings are equivalent to about 40 percent of global annual mine supply, with a total value of more than $50 billion -- up from $114.9 million when it was launched in 2004.The SPDR Gold Trust is cross-listed on the Singapore, Hong Kong and Tokyo exchanges which allows investors to buy the shares at any time of the day.The global jewellery sector's demand for gold dropped 20 percent last year and it may have little choice but to adapt to current prices. Jewellers in India, the world's largest gold consumer, have waited in vain for prices to fall back below $1,000.In fact, although still tiny, investment demand in India is growing because of high inflation there.REPEAT OF LAST YEAR'S SELL OFF?"The feeling is very strong in the investment consumption. Looking at the investment demand in the past 4-½ months, it looks like the trend is going to continue and to catch up with jewellery consumption," said Albert Cheng, the World Gold Council's Far East managing director."Jewellery demand is sensitive to gold price movements. But the price of gold has been staying above $1,000 for almost eight months. People have to get used to it."Analysts discounted a repeat of last year's brutal sell-off following gold's rise to a record high in December or liquidation of ETF holdings from investors who wished to reap a profit."The euro zone crisis is not over yet. It will spread eventually because many European banks are holding on to Greek bonds which carry the IMF/EU guarantee," said Wong Eng Soon, investment analyst at Phillip Futures in Singapore."One can never be sure if haircuts need to be made for bond holders should credit conditions deteriorate."(Additional reporting by Nick Trevethan in SINGAPORE)(Editing by Clarence Fernandez)(For more business news on Reuters Money visit http://www.reutersmoney.in)
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