The Gold Rally Shows Its Age

The metal ends its 11th straight winning year on a down note

Gold is sending investors a mixed message. The metal gained 10 percent in 2011, marking its 11th consecutive annual gain, its longest winning streak in at least nine decades. Yet after closing at a record $1,900.23 an ounce on Sept. 5, it plunged, finishing the year at $1,563.70 an ounce, down 18 percent from the high.

Professionals are taking widely divergent stances on the gold rally, which has seen prices rise sixfold since 2001. George Soros, the billionaire who two years ago called gold the “ultimate asset bubble,” cut 99 percent of his holdings in the first quarter of last year, Securities and Exchange Commission data show. Hedge fund manager John Paulson also sold gold last year. The median estimate in a Bloomberg survey of 44 traders and analysts is for prices to rally as much as 37 percent, to $2,140 an ounce this year. “Gold is going to go higher, but it’s not going to go in a straight line,” says Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth, which manages Dynamic Mutual Funds. “Gold has given positive returns, but it doesn’t necessarily do it in the way that gives comfort, and that makes people nervous.”

Demand for gold had strengthened most of last year as Europe’s debt crisis widened and the U.S. Federal Reserve pledged to keep interest rates near zero until at least mid-2013. Low interest rates increase the appeal of bullion because they generally reduce the prospect of returns on bonds. “The longer-term trends, mainly government fiscal and monetary policies, haven’t changed,” says Tom Winmill, president of Midas Funds.

Paulson, the billionaire fund manager mired in the worst slump of his career, sold 36 percent of his stake in the SPDR Gold Trust in the third quarter, an SEC filing showed. Paulson & Co. remains the biggest investor in the largest gold-backed exchange-traded fund, with a stake valued at $3.08 billion. Stefan Prelog, a spokesman for Paulson, declined to comment. Soros Fund Management sold almost all its shares in the SPDR Gold Trust and the iSharesGoldTrust in the first quarter of 2011, SEC data show. Its 81-year-old founder said in January 2010 that buying at the start of a bubble was “rational.” It bought more SPDR Gold Trust shares in the third quarter and added options, SEC data show. Michael Vachon, a spokesman, declined to comment.

“Gold has been all over the place,” says Michael Cuggino, 48, who helps manage about $15 billion of assets, including $3 billion in gold, at Permanent Portfolio Funds in San Francisco. “If you bought gold at $1,800, then you aren’t too happy. Some people will get out of gold, but the longer-term investors will remain.”


    The bottom line: Even after falling 18 percent from its Sept. 5 close, gold finished 2011 with a 10 percent gain, outperforming stocks, bonds, and the dollar.

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