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Gold evolves from a 'barbaric relic' to biggest winner of 2016

Monday, February 29, 2016 - 07:07

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The precious metal is the year's best-performing major asset.

[NEW YORK] Gold's comeback is dominating 2016.

The precious metal is the year's best-performing major asset. Its 15 per cent gain is topping gauges of high-yield and investment grade bonds, Treasuries, all currencies and major stock indexes in developing and emerging countries.

Turmoil across global equity and currency markets has sparked demand for a haven. Speculators raised their net-long position in gold to the highest in a year. SPDR Gold Shares, the world's largest bullion exchange-traded fund, attracted US$4.5 billion of new money in 2016, the most among all US-listed ETFs, according to Bloomberg data as of Feb 25. It's a turnaround from just a few months ago, when investors were selling the metal, sending prices in December to a five-year low.

"Gold has been the biggest story of this year," said Dan Denbow, a portfolio manager at the USAA Precious Metals & Minerals Fund in San Antonio, which oversees US$600 million. "Last summer, people were calling it a barbaric relic, and nobody could care less about gold. Now, it's slowly generating more and more buying." Futures advanced 9.3 per cent since the end of January to $1,220.40 an ounce, poised for the biggest February gain since 1979. This year, US treasuries rose 2.9 per cent, while the MSCI All-Country World Index of shares fell 6.5 per cent. The yen, 2016's best-performing major currency, rose 5.5 per cent against the dollar.

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The net-long position in gold futures and options jumped 32 per cent to 123,566 contracts in the week ended Feb 23, according to US Commodity Futures Trading Commission data released three days later. Long wagers climbed for an eighth straight week, the longest streak since 2012.

Deteriorating global economies have increased concerns that the slowdown will be a drag on US growth, raising gold's appeal as a safety asset. At the same time, there is increasing doubt that the Federal Reserve will move as quickly as it planned to raise interest rates because the expansion may weaken. That increases the allure of bullion as a store of value.

Global holdings in gold ETFs surged 15 per cent in 2016 to 1,678.7 metric tons. That's the highest in a year, and the assets are on pace for the biggest quarterly increase since 2010.

The changing economic picture has pressured some analysts to rethink their approach to gold. Oversea-Chinese Banking Corp economist Barnabas Gan, the most accurate precious-metals forecaster tracked by Bloomberg last year, and Georgette Boele, a strategist at ABN AMRO Group NV, had been bears and are now reversing their negative outlook. Gan last week dubbed bullion a "superhero," and said prices could reach $1,400 if risk aversion intensifies. Boele boosted her year-end forecast to $1,300, from $900. The metal dropped 10 per cent in 2015 to $1,060.20. A gain this year would the first annual increase since 2012.

There are still naysayers. Robin Bhar, a London-based analyst at Societe Generale SA, is keeping his average fourth-quarter price forecast at $955. Goldman Sachs Group Inc analysts including Jeffrey Currie and Max Layton reiterated in a Feb 15 report their December forecast that prices will drop for a fourth straight year, dipping to $1,000 by the end of 2016. The Goldman analysts and SocGen's Bhar expect that the Fed will raise rates this year, eroding the appeal of the metal because it doesn't pay dividends or yields.

"We're not ready to make the cross into the bullish camp yet," Bhar said in a telephone interview. "It's a bit painful for the bears, ourselves included, but we just don't see the evidence yet. We expect global turmoil to start easing. Obviously, if it doesn't, it's another warning sign, and we'll see further buying of gold, further inflows into the gold ETFs."

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