Gold ETFs buying an ‘early stage mania’, will push prices to record highs in one month – UBS

By: Clara Denina – Correspondent

London, 13 March 2009 - Gold safe-haven buying through exchange-traded funds (ETFs) is seen as an ‘early stage mania’ and is set to increase further, lifting the metal’s prices to record highs of around $1,050 in the one-month period, John Reade at UBS said on Friday.

“There are a lot of people who want to access to the gold market, while others want to switch their access into a more physical holding,” he said in a conference call.

“I consider this degree of interest to be a mania...or better an early stage mania,” he added. The gold price is now forecast to reach $1,050 in one month, a new record high, some $28 higher than the all-time high of $1,032.60 hit in March 2008.

Since the start of the year, gold has been sustained by unprecedented investment buying through ETFs and prices reached an 11-month high of $1,006 hit on February 18.

A subsequent lack of interest in the world’s biggest gold ETFs that started in mid-February has then seen gold declining to its worst in over one month below $900 this week.

“Interestingly enough, in the last two day the inflows into the gold ETFs have started again, even if at a relatively slow rate. But this has certainly improved the short-term outlook for gold,” Reade said.

After days of inaction, inflows into the seven biggest funds showed a near 13 tonne increase to 1,475.54 tonnes in the past two sessions, with holdings in the biggest physically backed exchange-traded fund SPDR advancing to a record high of 1,041.53 tonnes to become the world’s sixth-largest gold holder, overtaking assets held by Switzerland, currently at 1,040.10 tonnes.

The analyst also noted that the appreciation in the gold price earlier this year was seen in “an environment where the dollar was strong and this means that the game has changed and the reason why this has changed is because of safe-haven inflows.”

For the past two years, US dollar fluctuations have been matched almost exactly by an inverse movement in the gold price, also mirroring the inverse relationship between the US currency and the euro.

This US dollar/gold link was mostly due to the fact that a weaker dollar makes gold cheaper for investors holding other currencies and often raises the metal’s appeal as an alternative investment.

However, since this inverse relationship has taken the back seat, as the metal continues to take direction from investors’ desires.

“People are concerned about the consequences of the global economic recession ...they are wary of quantative easing, seen as boosting money supply and they are very concerned about the currency debasement and the prospects for long-term inflation,” Reade said.

“The gold market is a small market, at least where gold is taken as financial instrument, and it does not take many investors to make a big difference to the gold price,” he added.

Consequently, as inflows of capital into gold ETFs continue to be a key component of the overall investment demand picture for gold, the analyst forecast a one-month price for gold at $1,050, while in the three-month period prices should reach $1,100.

In the longer term, gold is seen having the potential to reach $2,500 an ounce.


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