Titans face gold battle – Umesh Shanmugam

goldbars‘Some of the mugs have taken extreme bets on a falling gold price,” says one precious metal retailer. “Never have the money managers become so convinced that gold is about to fall heavily.”

“It could actually mean that the gold price is about to rise strongly “as they must buy back these positions”, the seller argues. So runs the logic among those with a tendency to dangle every piece of news, good or bad, in front of would-be customers as an incentive to buy the precious metal.

Still, the biggest of gold backers would have to admit that now may not be the best time to be flogging gold, as economic optimism around the US, the world’s biggest economy, rises, and worries around the eurozone recede.

Speculation that the US Federal Reserve might scale back its massive monetary easing efforts earlier than expected have further weakened demand for the “safe haven” metal.

The price is now down 5pc this year to $1,582 (£1,059) an ounce. Loud talk among investors is that 2013 may mark the end of its spectacular 12-year bull run.

“You can fondle it, you can polish it, you can stare at it,” he once told shareholders. “I’d bet on a good producing business to outperform something that doesn’t do anything.”

It is a sentiment becoming increasingly evident as investors pile into companies’ shares.Wall Street set a fresh record on Friday, as the Dow Jones, the US index of its top blue-chip companies, passed the 14,410-mark on the back ofmuch stronger than expected jobs figures.

The FTSE 100, Britain’s benchmark index, meanwhile closed at 6,483.58, its highest level since December 2007.

Not all are convinced by the strength of the rally. Jeremy Grantham, the British-born investment manager who takes a dim view of the US economic prospects, warned in his latest circular that many assets are “once again brutally overpriced”.

Still, rather than gold, the research team at his $106bn fund GMO has ranked timber the number one asset class for expected returns over the next seven years.

The increasingly lonely-looking figure keeping the faith amid all this is John Paulson, the hedge fund manager who became a billionaire by betting against subprime mortgages before the financial crisis swept around the world.His gold fund, which holds about $800m of equities and derivatives related to the metal, is down 25pc this year. With Paulson’s own money thought to account for at least half of the fund, he has major personal exposure.Stick with us, investors were urged in a letter last week. “Despite the volatility and drawdown of our gold equity positions, we believe in the long-term outlook for these positions as quantitative easing programs continue around the world, credit expands in the United States, and gold equities continue to trade at a significant discount,” it read.

Paulson has also maintained his roughly 5pc holding in the SPDR Gold Trust, which leaves him the biggest investor in the world’s largest gold-backed exchange-traded fund.

That stake remained unchanged in size by the end of 2012, regulatory filings showed last month, but its value fell to $3.54bn from $3.75bn as the price of gold slid $100 in three months.The danger is that rather than mirroring the success of his bold bet against the US property market, Paulson risks repeating the recent losses he suffered as he proved over-confident on the US economic recovery.

In contrast to Paulson, recent filings showed that George Soros cut his fund’s smaller stake in that same gold-based ETF, SPDR, by more than half in the last quarter of 2012, down from $227m to $97m.Two years ago, Soros – renowned for “breaking” the Bank of England by selling the pound in 1992 and forcing the UK out of the exchange rate mechanism – had called gold “the ultimate asset bubble”. He now sees the risk of it bursting, it seems.

If there is no agreement from the world’s prominent investors on what gold will do next, that only reflects the wider debate continuing across the world’s financial centres.

Gold’s price slide has been going on for months, with February marking the fifth in which it fell, the longest run of monthly declines since 1997.Holders of gold know it is volatile, with everything from hints of central bank easing – sending investors to the metal as a protection from inflation – and movement in the dollar, to changing jewellery demand in India, shifting the price.

Gold also has a curious status in that it can behave as both a “risk-on” and “risk-off” asset. While investors flocked to buy the metal in the summer of 2011 during the eurozone debt crisis, in still more extreme times of market stress, such as at points during the credit crunch, the price has plunged, as people start selling their gold to cover losses elsewhere.

Investors were recently unnerved to see a particular signal at the end of last month, gold’s so-called “death cross”, when the price’s 50-day rolling average drops below its 200-day moving average. Two out of the last three such “death crosses” were followed by marked sell-offs.

As sentiment turned more bearish, an eye-catching note from Goldman Sachs grabbed attention. The bank cut its forecast for the gold price this year to $1,600 an ounce from $1,810, and predicted that next year the price will be $1,450.“The turn in the gold cycle has likely already started,” the bank’s analysts warned, pointing to “a quickly waning conviction in holding gold positions, especially ETFs”.

Goldman is not the only one to notice that, Paulson aside, holdings in exchange-traded products backed by gold have been shrinking at a rapid rate. On Thursday, they fell to 2,486.2 tonnes, the lowest since September, according to data from Bloomberg.

The waning enthusiasm for gold among the ETF investors is being treated as particularly significant, as they are seen as long-term “buy and hold” types rather than more speculative investors.

Recent weeks have also seen other investment banks express similar views on the gold price to Goldman, BNP Paribas, Credit Suisse and Citigroup, to name a few of those turning sour.But there is no consensus. Bank of America Merrill Lynch still expects prices to rise strongly next year to an average of $1,838 an ounce, although it sees prices turning lower in 2015.At the more extreme end of forecasts, Capital Economics, the UK economics consultancy, says gold will reach a new record of $2,000 later this year, warning that the eurozone will flare up again and the rally in equity markets may run out of steam.

That is not quite as eye-popping a forecast as it might seem, as when the impact of inflation is factored in, the price of gold was considerably higher, at about $2,400 an ounce in “real” terms, in early 1980.

Crucially, Capital does not see the ETF movement as driving the gold price in the future, but rather reflecting what has already happened.If the price rises, investors would soon be heading back in, argues Ross Strachan, Capital’s commodities analyst. “You tend to get people looking at it as ‘they are flowing out, that should push the price down’. But to some extent that has already happened,” he notes.

Still, he admits: “There is an inherent difficulty in valuing gold – it’s much trickier than for almost any asset you care to name.”

Bears and bulls beware.