Traders go for gold as inflation defense

Gold traders are getting more bullish after billionaire hedge fund manager John Paulson told investors that it is time to buy the metal as protection against inflation caused by government spending.

Twelve of 22 traders surveyed last week by Bloomberg expected prices to rise this week, and five were neutral.

Paulson & Co. Inc. is already the biggest investor in the SPDR Gold Trust (GLD), the largest exchange-traded product backed by bullion, with a stake valued at $2.9 billion, a Securities and Exchange Commission filing Feb. 14 showed. Investors have 2,389.7 metric tons in exchange-traded products, within 0.2% of the record reached in December and more than all but four central banks, according to data compiled by Bloomberg.

SPECULATORS BULLISH

Speculators in U.S. gold futures are their most bullish since September after the Bank of England and the Bank of Japan said that they would buy more assets, and the Federal Reserve said that it was considering purchasing more bonds.

Central banks are also expanding their bullion reserves, adding 439.7 tons last year, the most in almost five decades. They may buy a similar amount this year, the World Gold Council said.

“The appalling state of fiscal finances of most industrial nations does lead to concerns about the possibility of inflation,” said Mark O'Byrne, executive director of GoldCore Ltd., a brokerage firm that sells everything from quarter-ounce British Sovereigns to 400-ounce bars. “Gold is a crucial diversification given the various risks out there.”

Gold has risen 9.9% to $1,722.20 an ounce this year on the Comex in New York.

The Standard & Poor's GSCI gauge of 24 commodities has gained 6.6%, and the MSCI All-Country World Index (MXWD) of equities has climbed 9.7%. Treasuries have lost 0.5%, a Bank of America Corp. index (MXWD) shows.

Hedge funds and other money managers have boosted wagers on higher prices by 57% since mid-January. They raised their net-long position by 8.6% to 173,172 futures and options in the one-week period ended Feb. 7, the highest level since mid-September, Commodity Futures Trading Commission data show.

Central banks are keeping interest rates at or near record lows and expanding stimulus measures to spur growth that the International Monetary Fund predicted Jan. 24 will be 3.3% this year, down from a previous forecast of 4%. Greece is seeking more aid on top of the 110 billion euros ($145 billion) awarded in 2010, and Moody's Investors Service Inc. cut the ratings of six European nations Feb. 13.

“By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold,” Paulson & Co. said in a letter to investors obtained by Bloomberg.

Armel Leslie, a spokesman for Paulson & Co., declined to comment.

Mr. Paulson's SPDR Gold Trust holdings fell 15% in the fourth quarter as his $23 billion hedge fund company had its worst-ever year. His Advantage Plus Fund lost 51% last year, and the firm said in a third-quarter letter that financial services companies were the “primary drag.”

Mr. Paulson became a billionaire in 2007 by betting against the U.S. subprime-mortgage market.

Gold rose 10% last year in New York trading, an 11th consecutive annual gain.

Europe's deepening debt crisis may spur some investors to retreat to cash. Bullion dropped 3.4% in the three-month period through December, the first quarterly decline since 2008, as the value of global equities slumped more than $10 trillion from the May peak, data compiled by Bloomberg show.

DEBT CRISIS

“Despite the strong start to global markets this year, the underlying sentiment is still one of fear,” said Chris Weafer, chief strategist at Troika Dialog, an investment bank in Moscow. “Until the eurozone debt crisis is put to bed, all assets, even gold, are in the risk category.”

Investors should avoid gold because its uses are limited and it lacks the potential of farmland or companies to produce new wealth, Warren E. Buffett, the billionaire chairman of Berkshire Hathaway Inc., wrote in an adaptation of his annual letter to shareholders that appeared on Fortune magazine's website Feb. 9.

SAC Capital Advisors LP, Tudor Investment Corp. and Vinik Asset Management LP sold shares in the SPDR Gold Trust in the fourth quarter, filings showed.

George Soros, the billionaire founder of Soros Fund Management LLC, raised his stake to 85,450 shares, from 48,350.

Record investment drove gold demand to 4,067.1 tons last year, the most since 1997, the World Gold Council estimates.

Nine of 24 traders and analysts surveyed by Bloomberg last week expected copper to climb this week, and seven were neutral. The metal for delivery in three months, the London Metal Exchange's benchmark contract, rose 7.4% to $8,161.50 a ton this year after declining 21% last year.

Ten of 14 people surveyed expected raw-sugar prices to drop this week. The commodity is up 1.8% this year at 23.72 cents a pound on ICE Futures U.S. in New York.

Eleven of 21 people surveyed anticipated lower corn prices this week, while 12 of 22 said that soybeans would advance. Corn fell 0.3% to $6.45 a bushel this year as soybeans rose 5.7% to $12.77 a bushel.

“By initiating further rounds of quantitative easing, central banks should be one of the supporting factors for commodity prices,” said Daniel Briesemann, an analyst at Commerzbank AG. “The high uncertainty and growing risk aversion among market players surrounding the Greek debt saga should depress any meaningful price increases.”

Related Topics: Inflation