Gold rebounds amid bargain-hunting

PUBLISHED : Wednesday, 28 September, 2011, 12:00am
UPDATED : Wednesday, 28 September, 2011, 12:00am


Gold prices rebounded strongly yesterday after their sharpest price correction in three years as bargain hunters turned to bullion, a traditional safe haven that has delivered high returns in recent years.

Gold for immediate delivery recovered 2.2 per cent to US$1,662 an ounce yesterday in early London trading, after falling 8.8 per cent in the previous three days.

Analysts said some investors were forced to sell bullion to cover losses in other assets after equities and commodities fell sharply.

Silver gained 3.6 per cent to US$31.85 an ounce, after plunging 23 per cent in the past three days.

The declines came even though gold exchange operators in New York and Shanghai raised the margin requirements for gold futures yesterday by 20 per cent in the face of high market volatility in order to manage the risk of potential losses.

Analysts said there had been no big outflows from exchange-traded gold investment funds and the gold holdings of the world's largest gold-backed exchange traded-fund (ETF), SPDR Gold Trust, had been steady for the past week. These, they said, were signs the correction had been driven primarily by the liquidity needs of some investors rather than a fundamental change in the investment outlook for bullion.

'As gold ETFs are hardly registering any outflows at the moment, the strong price correction should essentially be due to profit-taking of speculative financial investors,' said a Commerzbank research note.

EPFR Global, a provider of fund flows and asset allocation data to financial institutions, said last Friday that funds had shifted in recent weeks from soft and industrial commodities to precious metals funds.

Dominic Schnider, UBS Wealth Management head of commodity research, said gold futures remained in a net long position as of last Friday, even though non-commercial traders cut their net gold holdings by 9.6 per cent in the week to September 20.

SPRD Gold Trust's gold holdings edged down 0.4 per cent to 1,246.8 tonnes on Monday, after holding steady at 1,252.2 tonnes in the previous four trading days.

The fund, managed by State Street Global Advisors, allows investors to gain exposure to gold without taking physical delivery.

Gold plunged to as low as US$1,532.72 on Monday, the lowest since July 8, before settling above US$1,600. It set a record high of US$1,923.70 on September 6.

'The slowdown of the global economy will not make the fundamental problems [of high sovereign debt and weak currencies in the US and Europe] disappear,' Schnider wrote in a research note. 'While real interest rates [are] likely to become less negative [due to lower inflation], this should still motivate sufficient interest in [gold] once investors' liquidity needs to satisfy margin calls of other assets comes to an end.'

Negative interest rates refer to the situation in which consumer price inflation exceeds that of other interest rates, meaning savers lose purchasing power if they keep cash. The US, Hong Kong and the mainland are in a negative interest rate scenario.


The price for gold per ounce, in US dollars, that UBS analyst Dominic Schnider says could be reached within the next 12 months