By Ambrose Evans-Pritchard
The world’s big money brigade is snapping up gold bullion at eight times the rate originally thought, according to a report by UBS, the world’s biggest gold trader.
The huge sums entering precious metals below the radar are likely to help to put a floor under the gold price after the dramatic fall of $112 an ounce in late May – the sharpest correction since the bull market began five years ago.
The Swiss bank said information from its trading floor suggested that funds and investors were allocating 20pc of their commodity portfolios to precious metals.
This is far more than the index tracking funds run by Goldman Sachs, Dow Jones-AIG, and others, typically taken to be a guide to overall investment flows.
UBS said these indexes gave a deeply misleading impression, obscuring a silent shift of funds from oil into gold.
The Goldman Sachs GSCI index, for example, has a gold and silver weighting of just 2.27pc, compared to 73pc for energy.
“If our traders’ experience is representative of trends in the wider market, this has very important implications for metals investment,” said the bank’s gold expert, John Reade.
The UBS gold reports are watched closely by the markets. The Zurich bank is the world’s leading gold trader and manages the biggest known stash of private client wealth, surpassing $1,000bn.
The extra volume in gold buying has been channelled through the London Bullion Market Association, eclipsing the Comex futures market in New York usually monitored by speculators for clues.
Gold recovered from lows of $618.50 an ounce last week to end at $637.30 after weak US jobs data renewed fears of a dollar slide.
“The sort of money that is chasing this market higher is not hot money,” Ross Norman, director of the BullionDesk.com.
“It is slow steady investment by pension funds and long-term buyers. Anybody who thinks this market is about to head sharply lower is reading it badly,” he said.
Mr Norman said there was a chronic dearth of new mine supply across the world due to eco-regulations and a lack of discoveries.
Output in South Africa, the world’s biggest supplier, fell to 10.9pc in the first quarter of 2006 despite high prices. The country’s production has reached its lowest level since 1923. “It’s becoming very hard to get gold out of the ground,” he said.
Oil states armed with an estimated current account surplus of $480bn in 2006 are thought to be feeding the “stealth demand” for bullion, led by Russia.
President Vladimir Putin, a frequent critic of dollar hegemony, has ordered the Russian central bank to raise the gold share of foreign reserves from 5pc to 10pc.
Russia’s reserves have surged to $237bn – the world’s fourth biggest – after rising 61pc in 2004 and 40pc in 2005. With a current account surplus of 10pc of GDP, it must sweep up a big chunk of global gold output just to stop its bullion share of reserves from falling.
In China, monetary committee member Yu Yongding last week issued the most explicit call to date for Beijing to diversify its $875bn reserves into gold to protect against a tumbling dollar. “We need to use some of the reserves to buy other assets such as gold and strategic resources such as oil,” he said.
UBS warned that gold may have further to fall, followed by a period of sideways trading before embarking on another powerful upward leg of the bull-market rally.
Mr Reade said the immediate risk was a global economic downturn, dragging gold down in an avalanche sale of all commodities.
But if the global economy turns nasty, gold will ultimately decouple from its base metal cousins and regain its usual role as a safe haven currency and defence against dollar disorder. “The bottom line is liquidation first, haven later,” he said.
Source: Telegraph
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