Money Managers Remain BullishMetals Plummet, Money Managers Remain Bullish
By Jon A. Nones
15 May 2006 at 11:29 PM EDT
NEW YORK (ResourceInvestor.com) -- Although not entirely unexpected, the metal prices took a bashing today, posting losses across the board. Gold lost 3.8%, silver 7.7%, copper 6.8%, platinum 2.6% and palladium a brutal 11%, but still two prominent money managers at the New York Hard Assets Investor Conference remain bullish.
In a presentation entitled, “What’s Driving Gold,” Frank Holmes, U.S. Global Investors, Inc. Chairman and CEO, told a crowded hall of investors that “we are still in a secular bull market.”
But Holmes said warning signs have become apparent in the near term due to “too much froth.”
Commodities are hitting main stream news sources indicating a very high bullish sentiment. Holmes said investors would be wise to be cautious in the near term, taking profits here and again.
Seasonally, gold and silver rise at the beginning of spring and fall off in the summer. Where are we now as compared to last year?
In copper, Holmes noted the correlation between the housing market and copper prices, because after all, houses need wiring. The slow-down in the housing market could cause a correction in copper, he said.
The National Association of Realtors reported that existing home sales rose slightly to an annual rate of 6.92 million units in March from February's 6.9 million. But that was down from 6.97 million units in March 2005.
Housing inventory stood at 3.4 million units available at the end of March, a 5.5-month supply. The median existing home price of $218,000 is up 7.4%.
But still, Holmes made sure to reiterate that he remains bullish on metals, especially gold, in the long term.
“We have a unique situation when all the critical drivers of gold are pointing in the same direction,” he said.
Holmes noted the importance of taking into account the U.S. debt and real growth domestic product (GDP) statistics, saying that “when we sneeze, the rest of the world catches pneumonia.”
Although GDP statistics showed that the U.S. economy snapped back in the first quarter, growing at an annual rate of 4.8%, the GDP rose just 1.7% in the fourth quarter of last year, held back by weak consumer and capital spending.
Furthermore, the House of Representatives is preparing to raise the federal debt limit for the fifth time in four years and the second time this spring, this time to nearly $10 trillion. That's almost double the $5.7 trillion gross federal debt of fiscal 2001.
According to Holmes, the commodities boom is based largely on soaring infrastructure and economic growth in emerging countries like China.
“There is a huge shift in the world, and as long as war doesn’t take out these countries, we’re going to continue to see a secular bull market,” said Holmes.
Holmes said that the bull market has drawn in the pension funds. These pension funds have invested $80 billion into index funds but haven’t hit stocks, he added. This could possible explain why gold stocks haven’t yet caught up to bullion.
However, he said that most significant driver is the oil to gold ratio.
On November 5 of last year, RI reported that an ounce of gold bought at least 8 barrels of oil. This was after the ratio between oil and gold reached an all-time monthly high of 0.131, or 7.63 barrels per ounce on June 27, 2005.
Today, one ounce of gold buys 9.86 barrels of oil still far from the 35-year average of 15.3 barrels of oil per ounce of gold.
Holmes concluded by saying “don’t overload in gold – you shouldn’t have more than 25% allocated” – but if you do, take some profits here and there.
Dr. Martin Murenbeeld, Chief Economist of the Dundee Group of Companies, spoke later in the day, expressing the same general sentiment. He too warned of a correction near term, but remained bullish in the long term.
“The geopolitical environment is going to favour gold for some years to come,” he said.
Murenbeeld said geological tensions will continue to fuel investment demand, noting the current situation in Iran. He reminded listeners of the global events leading to gold’s peak in the 1980s - the Iran hostage crisis.
In the most recent edition to “Gold Monitor” released yesterday, Murenbeeld said maybe the “mother of all corrections” is just around the corner, but “I would be scared to be short gold here.”
Like Holmes, Murenbeeld also noted that pension funds are currently in the process of adjusting their exposure to commodities to some new “equilibrium” level.
“Investors held $120 billion in U.S. commodities” in April according to Citigroup quoted in Bloomberg. Citigroup estimated there is now $200 billion invested in global commodity funds, according to the report.
Assuming there are 485 tonnes of ETF gold residing in vaults, then there is about $10 billion invested in gold, wrote Murenbeeld. This is about 5% of the global total.
U.S. retirement assets in the mutual fund industry total about $14 trillion according to the Investment Company Institute. If only 1% goes to commodities, that is $140 billion, he wrote.
“The fact is, the bullish case for gold remains compelling,” he said in the report.
Metal Price Activity
After gaining $50 or so from Friday to Friday last week, gold for June delivery fell $26.80 to close at $685 an ounce.
July silver plunged $1.09 at $13.145 an ounce.
July copper shed 26.40 cents to $3.60 a pound.
July platinum slumped $33.80 to $1,284.70 an ounce, after running up 11% the prior week.
The biggest decliner was June palladium, which was knocked down $43.35 to $355 an ounce.