UBS: The $8,000,000,000,000 Official Sector Likes Gold

Today’s AM fix was USD 1,622.25, EUR 1,284.44, and GBP1,043.58 per ounce.
Yesterday’s AM fix was USD 1,619.00, EUR 1,289.83, and GBP 1,044.65 per ounce.

Silver is trading at $28.80/oz, €22.92/oz and £18.59/oz. Platinum is trading at $1,498.70/oz, palladium at $633.52/oz and rhodium at $1,215/oz.

Gold edged up $5.50 or 0.34% yesterday in New York and closed at $1,624.30/oz.  Gold traded sideways in Asia and is remaining in a narrow range holding above $1,620/oz in European trading.

Gold climbed for its 6th session, its longest rally since October, on news that the US recovery shows signs of faltering. Gold has crept gradually higher again this week and appears to be consolidating on the sharp gains seen on June 1st when gold surged after the poor jobs number (see chart below).  

Gold has rallied to a one week high as US jobless insurance benefits surprised and rose by 6,000, consumer prices fell in May and the current US account deficit grew in Q1 by its largest number in three years. Gold is being aided by suggestions that the Fed will employ more QE thereby further debasing the US dollar.

bullion chart

Gold Spot $/oz 20 days, 30 minutes – (Bloomberg)

The yellow metal will be supported by speculation that central banks from major economies stand ready to take steps to stabilise financial markets by providing liquidity and preventing a credit squeeze if the outcome of Greek elections on Sunday causes tumultuous trading.

If severe market strains emerge after an unusual confluence of three elections this weekend – there are important polls in Egypt and France as well – central bankers are on standby to ensure enough cash is flowing through the financial system and in an attempt to prevent bank runs and major problems in the world’s financial system.

There has been increased demand for gold and silver bullion in recent days and again today due to the high degree of risk associated with Greek’s elections on Sunday which could lead to its exit from the euro.  If the leftist candidate is successful there are concerns of serious dislocations in financial markets on Monday.

US Federal policy experts begin a 2 day meeting on June 19 to examine its monetary policy.  The Fed, has said that Greece’s departure from the euro would deepen the European debt crisis and threaten economic expansion in the United States. In the 2 prior rounds of QE from 2008-2011 the Fed bought a massive $2.3 trillion in bonds to lower borrowing costs and in a vain attempt to stimulate growth.

The Bank of England and British government look set to act together with new monetary policy measures worth some £100 billion to tackle tightening credit and financial market conditions triggered by the euro zone crisis.

The BOJ continues to maintain ultra loose monetary policy and is holding rates at near 0%. Separately, ex-Soros Japanese adviser Takeshi Fujimaki says Japan may default within five years.

Japanese and international investors are slowly realising that the yen is no longer a “safe haven” currency which has obvious positive ramification for gold.

$8 Trillion Official Sector Likes Gold – UBS Poll

Confirmation of how gold is regarded very favourably by the official sector has come from the largest private gathering of central bank reserve managers, multi-lateral institutions, and sovereign wealth funds in the world – UBS’ 18th Annual Reserve Management Seminar for Sovereign Institutions.

UBS’ 18th Annual Reserve Management Seminar for Sovereign Institutions Asset Poll 
More than 80 institutions with collective assets under management of over $8 trillion attended the event and were polled regarding macroeconomic matters and their outlook for various asset classes.

Gold is seen as one of the assets likely to outperform again in 2012 due to risks posed to the euro and longer term risks for the dollar.

Those polled by UBS were also positive on emerging market debt. Both asset classes, gold and emerging market debt, were the top pick of 22.5% of the assembly – thereby accounting for 45% of the votes.

On gold’s role as a reserve asset, the importance reserve managers attach to the yellow metal has slipped back to 2009 levels, with about 14% having the opinion that it will be the most important reserve currency in 25 years. This marks a decline from the past two years’ surveys wherein over 20% viewed gold to be the most important reserve currency. 

Cross Currency Table – (Bloomberg)

This year’s survey confirmed that reserve managers anticipate that the dollar will fall from its pedestal as the sole reserve currency within the next 25 years.

In past surveys (conducted over the past decade) the dollar typically was tipped to remain the chief reserve currency by a plurality—if not a majority—of those polled. This time, like last year, over half of respondents believe that within 25 years a portfolio of currencies will supplant the dollar in that role.

Central bank buying has provided good support for gold this year, and indeed has been evident just when the yellow metal needed it most, with physical demand taking a step back. But the survey results from this year’s Reserve Management Seminar, particularly on what reserve managers are thinking in terms of gold’s role in their respective portfolios and corresponding allocations, suggests that official sector support is unlikely to continue in the same magnitude as seen in the last year. 

However, UBS notes that the potential for new entrants should not be underestimated. After all, there are still a lot of countries, particularly among the emerging markets, that are very much under-invested in gold from a global perspective.

The possibility of this group catching the baton from the current more prominent official sector buyers certainly cannot be ruled out.

The majority of those polled expect one or more countries to exit the Eurozone.

About 43% of respondents anticipate one country leaving the Eurozone, a further 29% expect two or more exits and the remaining 28% are in line with our call for no exit. The possibility of a Eurozone exit is seen as the chief risk to global economic and financial stability over a 12-month period by 39% of participants. The risk of Eurozone sovereign default is a close second at 34%. The majority also see global economic stagnation over the next 12 months, with 36% viewing deflation as a bigger risk than inflation.

Indeed, the macro picture in the eyes of the world’s sovereign institutions does not look all that bright this year.

The UBS’ 18th Annual Reserve Management Seminar for Sovereign Institutions Asset Poll can be read here. 

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