UBS urges clients to buy gold - we already are say investors
The necessary conditions have been satisfied and it is time to invest
in gold once more; while ETC flow suggest interest in commodities has
returned
Author: Rhona O'Connell
28 August 2008
LONDON
UBS Commodity Strategist John Reade has put out a note today urging clients
to "Buy Gold". He is recommending that investors buy gold with an initial
target of $850 (the fix on the morning of 28th August was $833.50), which is
also the UBS one-month forecast price, with further gains expected "towards
$900 and beyond".
The three factors that UBS has been monitoring in order to take this
tactical stance have been the following:
Investment positioning
Fundamental demand
The dollar
Investment: there has been substantial long liquidation on COMEX, TOCOM and
the OTC markets. The historical Commitment of Traders figures from the CFTC
show that the commercial and non-reportable speculative position on COMEX
had contracted by Tuesday 19th August (the next figures, for the 26th, are
not released until after the close of business on Friday 29th) to 405
tonnes, which is the lowest since September 2007. Interestingly UBS notes
that the last time the bank made a strong tactical recommendation in gold
was August 2007, when the metal was trading at $600/ounce, pointing out that
the subsequent price performance demonstrates the potential for the metal
when the three above factors fall into place. The speculative long was at
its most extended in mid-July, when it hit a record 767 tonnes and over the
subsequent five weeks it declined by 47% or 362 tonnes. On TOCOM the
non-proprietary positions on the Exchange have declined by almost 20% since
mid-July while there is considerable evidence of sizeable liquidation in the
global Over the Counter market.
Holdings in Exchange Traded Funds have, by contrast, been comparatively
stable, losing 37 tonnes or 4% of their combined holdings. Since the date
when the COMEX long topped out (15th July) there have been increases in two
of the major instruments (the Exchange Traded Security in London and the ZKB
Fund in Zurich have increased their holdings by 23% and 13% respectively),
while the majority of the other funds have seen some attrition. The largest
fall in terms of tonnage was in the major fund, the New York StreetTRACKS
fund, which has contracted by 51 tonnes or 7%; the falls in the other funds
were much smaller, with a combined decline of less than four tonnes. The
volume held in the Australian fund has remained unchanged.
Over and above this, ETF Securities Ltd., which operates the trading
platform for the gold ETC (and a substantial number of other
commodity-related ETCs) in London has reported that the ETCs have been
experiencing strong flows of funds over the past fortnight, especially into
the broad ETCs, suggesting that that there has been a shift in sentiment
towards commodities, largely on oversold considerations. The gold ETC
enjoyed its tenth consecutive weekly rise in the week to 22nd August and
since mid-July the flows into this fund have reached $306 million.
Back at UBS the Bank states that it has seen "unprecedented" gold demand
from India, from European consumers and from other Asian clients, that
demand is very strong in Turkey and the Middle East and that it should pick
up in Italy as of early September as the holiday season draws to a close.
UBS is not alone in seeing this interest, with some Indian jewellers having
to turn away clients and, with the Wedding and Festival seasons imminent,
demand is expected to remain robust for the next few weeks. Diwali (the
Festival of Lights, which is a very important Hindu Festival, the largest
gift-giving and shopping festival in India and most popular for gold
purchases, falls this year on 28th October.
Other parts of Asia are trading at premia of more than $1 over London, and
the US Mint has had to ask dealers to suspend their orders for one-ounce
Eagles in late August and only reinstating orders a week later, and on an
allocated basis. Orders for Eagles in August have been running at three
times the levels of January-July.
The final component the UBS cocktail is the performance of the dollar and
the bank's head of FX Technical Strategy has issued a sell recommendation on
the dollar. This view would seem subsequently to have been bolstered by the
suggestions from senior members of the European Central Bank that, despite a
slowing in economic activity, rate cuts are not likely in the foreseeable
future.
September approaches, and with it the seasonal upturn in gold demand. The
mini gold-rush experienced in major consuming nations over the past couple
of weeks has prp-empted that to a degree, but the elements are in place for
renewed strength in gold and UBS has nailed its colours to the mast.