Gold is back in fashion after US$15t global equity decline

[NEW YORK] The $15 trillion rout in global equity markets since May is reawakening the lure of gold for investors seeking safety.

Hedge funds more than doubled their net-long position in bullion last week, just three weeks after they were the most- bearish ever. Investor holdings of gold through exchange-traded products are expanding at the fastest pace in a year, and the value of the ETPs has jumped by US$3 billion in 2016.

Bullion has seen a revival of its appeal as a haven after being mainly ignored last year in the face of the Paris terror attacks in November and the Greek bailout negotiations in July. This time around, concerns about global markets will support the metal, Citigroup Inc analysts led by Ed Morse said last week as they raised their 2016 price forecast.

"People have become complacent about risks, whether it's macroeconomic and geopolitical," said George Milling-Stanley, the Boston-based head of gold investments at State Street Global Advisors, which oversees US$2.4 trillion. "What's out of fashion may be coming back. That atmosphere of people feeling completely calm and untroubled, I think, is starting to go away. Gold is a very good risk-off trade, and I think people are starting to look very, very carefully at the risky positions that they have on a number of other markets." Futures gained 3.4 per cent in January to US$1,096.30 an ounce on the Comex in New York, heading for the biggest monthly gain since August. The net-long position in gold futures and options reached 1,934 contracts in the week ended Jan 19, according to US Commodity Futures Trading Commission data released three days later. That's up from 902 a week earlier and compares with a record net-short holding of 24,263 held at the end of last year.

Investors poured US$926 million into ETFs backed by precious metals so far in January, the latest data compiled by Bloomberg show. That's on pace for the biggest monthly expansion in a year. Holdings in global gold ETPs reached almost 1,500 metric tons last week. That's the highest since November.

Gold fell 10 per cent last year as investors awaited the first increase in benchmark interest rate by the Federal Reserve since 2006, which finally came in December. Fed Bank of Boston President Eric Rosengren said this month that the central bank's projected path for more policy tightening is at risk, citing falling estimates for US economic growth. Higher rates curb the allure of gold as an alternative investment because it doesn't pay yields.

The attraction to gold this month "could partly have to do with re-balancing investors' portfolio," said Kevin Caron, a Florham Park, New Jersey-based market strategist and portfolio manager who helps oversee US$180 billion at Stifel Nicolaus & Co. "An entry price here nearer to US$1,000 than US$2,000 makes a lot more sense." Gold is climbing on concerns about further contagion from China, volatile stock markets and tensions in the Middle East, Citigroup said in a Jan 19 report. The bank raised its 2016 outlook by 7.5 per cent to US$1,070. The turmoil will support prices this quarter, before a stronger dollar ends the rally later in the year, the analysts said.

Gold reached a five-year low in December as the dollar strengthened and US inflation stayed stagnant, cutting demand for the metal as a store of value. The cost of living in the US unexpectedly dropped in December, led by a slump in commodities. China's slowdown is combining with lower oil prices and competitive currency devaluations to increase the risk of deflation around the world, billionaire investor George Soros said in a Bloomberg Television interview last week.

"You're getting a short-term bounce based on the sell-off in oil and stocks, but the underlying fundamentals, the inflation expectations haven't changed," said Rob Haworth, a Seattle-based senior investment strategist at US Bank Wealth Management, which oversees US$128 billion of assets.

BLOOMBERG