Gold Seen Heading for 12th Annual Gain on Investor Hoarding

Photographer: Guenter Schiffmann/Bloomberg

Central banks have been net buyers for three straight years, the longest stretch since 1973. Close

Central banks have been net buyers for three straight years, the longest stretch since 1973.

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Photographer: Guenter Schiffmann/Bloomberg

Central banks have been net buyers for three straight years, the longest stretch since 1973.

Gold is poised for a 21 percent gain in 2012, extending its bull market to 12 consecutive years, as investors hoard record amounts and central banks expand reserves for the first time in a generation.

Bullion may rise to $1,897 an ounce in New York by Dec. 31 from $1,566.80 at the end of 2011, based on the average of 14 respondents in a survey at the Bloomberg Link Precious Metals Conference yesterday in New York. The rally that began in 2001 is the longest since at least 1920 in London, including a 10 percent gain last year.

Demand has strengthened as Europe seeks to contain its debt crisis, China’s economic expansion slows, and governments from the U.S. to the U.K. keep interest rates at all-time lows to shore up growth. Central banks have been net buyers for three straight years, the longest stretch since 1973, World Gold Council data show. Holdings (.GLDTONS) in exchange-traded funds backed by the metal reached a record 2,410.2 metric tons yesterday, data compiled by Bloomberg show.

“There are significant shifts going on in the world,” said Martin Murenbeeld, the 67-year-old chief economist at Toronto-based DundeeWealth Inc., which manages about $100 billion in the Dynamic Mutual Funds. “Gold has become an investment, an asset class, and over time, we are only going to be building it up. The central banks are holding gold because they are not sure if the euro will remain five years later.”

Gold futures have rallied 4.9 percent this year to $1,642.90 on the Comex in New York. That compares with a 9.1 percent jump in the Standard & Poor’s GSCI Spot Index of 24 commodities, and a 11 percent appreciation in the MSCI All- Country World Index of equities. Treasuries lost 0.9 percent, a Bank of America Corp. index shows.

Low Rates

The Federal Reserve has kept U.S. borrowing costs at a record low near zero percent and conducted two rounds of asset purchases, or so-called quantitative easing, in a bid to boost growth, fueling demand for gold as a hedge against inflation and a drop in the value of the dollar. Yesterday, the Fed said in a statement that the labor market was improving.

Portugal is raising taxes and cutting spending to meet the terms of its 78 billion-euro ($102 billion) aid plan from the European Union and the International Monetary Fund after it followed Ireland and Greece in seeking a bailout last year. Last week, Greece pushed through the biggest sovereign restructuring in history.

“Gold is the ultimate downside protection,” Rachel Benepe, who helps manage $3.5 billion, including 17 percent in gold bullion, at the First Eagle Gold Fund in New York, said at the conference. “The future is uncertain, and we have no idea how we’re going to get through with this situation. That’s why we own gold.”

Monetary Policy

Part of the metal’s rally has been fueled by expectations that central banks will take additional steps to spur economic growth. Francisco Blanch, the head of commodity research at Bank of America Merrill Lynch Global Research, said at the conference that gold would reach $2,000 this year as the Fed seeks to add an additional $800 billion of monetary stimulus.

Later in the day, the U.S. central bank raised its assessment of the economy, eroding prospects for more stimulus. Prices fell as much as 2.2 percent.

“People buy gold for benefits of diversification and hope it does not do well,” Jeffrey Nichols, a senior economic adviser to Rosland Capital LLC, said at the conference.

Gold futures for April delivery declined 3 percent today, falling for the third straight session. Prices are down 4 percent this month, while the dollar jumped 2.3 percent. The precious metal remains below its record of $1,923.70, reached on Sept. 6.

Institutional Holders

The rate of growth in gold holdings by institutional and private investors has declined in the last few months, according to Christoph Eibl, a founding partner of Zug, Switzerland-based Tiberius Asset Management AG.

“It is not a messiah,” Eibl said. “Be opportunistic and invest in gold. Eventually, trust will come over to the fiat currency.”

Shares of mining companies including Greenwood Village, Colorado-based Newmont Mining Corp. and Toronto-based Barrick Gold Corp., have lagged the price of gold. The Philadelphia Gold & Silver Index (XAU) of 16 producers is up 1.6 percent this year through yesterday, compared with an 11 percent gain in the broader S&P 500 Index. The gauge of gold producers slumped 20 percent last year.

“The only way to protect wealth is to buy gold because it is probably the only money that is relatively indestructible,” Michael Pento, the president of Pento Portfolio Strategies in Holmdel, New Jersey, said at the conference. Pento, who correctly predicted the annual high for prices in the past three years, forecast a record $2,150 by the end of 2012.

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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