Global funds mop up 595 tn yellow metal

Gold exchange-traded funds (GETFs) the world over have seen an inflow of about 60 tonne of the yellow metal in November 2006, taking the total gold holding in the funds to 594.8 tonne, according to a report released by ScotiaMocatta on Friday.

Of the total inflows in November, the US investors alone added about 53 tonne of gold into the ETFs. This indicates a strong preference among investors for the yellow metal as a hedge against the currency risks, the report added.

The report further said if this volume of buying continues into further dollar weakness, gold can begin the upward momentum again. Gold prices are, currently, on a downward trend, following a general slack in all metal prices.

However, the changing dynamics of the dollar and fresh talk of the European Central Bank (ECB) diversifying its holdings from the dollar to other currencies have fueled long-term investors' interest in gold.

According to the report, the rebound in gold has pushed ahead through the recent resistance points of $636 per ounce, but has failed to sustain it for long.

But the yellow metal prices are likely to shoot up and may find resistance at the next two horizontal lines at $656 per ounce and $676 per ounce respectively. The report, however, warned of some consolidation in the prices before taking the upward move.

Apart from the economic reasons for the dollar to weaken, the move seems to have been accentuated by further talk and evidence of the ECB diversifying out of the dollar and into other currencies.

Italy has reduced its dollar holdings in favour of the Sterling, while Japan has cut the amount of US treasuries it holds and the UAE is looking at reducing its dollar reserves by 10 per cent in favour of the Euro and the Sterling.

Surprisingly, other central banks are considering similar moves. But the most worrying is China's more vocal warnings that Asia's central banks are at risk from a falling dollar. However, as they are heavily tied to the dollar, any move to sell dollars would be counter-productive.

More importantly, they would keep the current dollar reserves, but going forward, will add assets denominated in other currencies, presumably including gold. The medium- to long-term outlook for the yellow metal has improved of late with more central bankers warning of dollar diversification.

In addition, regional differences in the economic outlook and data also point to a weaker dollar. Although the US funds may already be well invested in gold, there is still a lot of potential from Japanese and European funds as well as from individual investors.