Institutional Investors Return to Gold

Posted: Mar 12, 2012 12:01 AM

Institutional investors increased their holdings in bullion-backed exchange traded products again last week, now cumulatively holding something on the order of 2,400 metric tons.  That’s a lot of gold. 

Despite the scare the markets got from Fed Chairman Ben Bernanke, big investors are still betting that there will be another round of easing.  The Federal Reserve printing money, the prospect of inflation and the ongoing zero-percent interest rate policies in both Europe and the U.S. are all continued bullish indicators for gold. 

That brings us to next week and I join the majority of analysts expecting gold to go higher next week, but likely no higher than the $1,720 range.  That’s roughly the level we were at before the big plunge. 

The recovery in gold prices has been tentative, mainly due to the big bite gold futures took on February 29th after Chairman Bernanke failed to signal the Fed’s willingness to pump more cash into the economy. 

Perhaps you noticed that all the money the Federal Reserve is dumping into the economy is not making it down to you and me.  That’s because big banks are not loaning that money out to small businesses and companies planning capital expansions.  According to a report by the Government Accounting Office the banks are using that money to pay back the money they borrowed from the government to cover their bad bets in the housing market.  Nice, huh? 

The bottom line for those of us on the lower end of the economic spectrum is we’re experiencing all the negative aspects of more liquidity in our economy without getting any of the benefits.  That has spurred a recovery among the nations wealthiest that is only slowly making its way down to the rest of us.  It’s comforting to know the economy is working for someone, isn’t it? 

The winners in all this will be people holding actual physical gold and silver.  The hedge fund managers and speculators trade primarily in options and bullion-backed exchange traded products which are as volatile as any other investment instrument.  All their gold and silver trades are settled in cash.  But actual physical gold is going to hold some relative value, even if exchange traded products and the futures market collapses. 

What that value is, no one can really say.  The spot price is just a calculation based on futures prices, but it really doesn’t matter.  It’s almost a sure bet it will be worth more than ink on paper and that’s why you hold physical gold and silver instead of options. 

Chris Poindexter, Senior Writer, National Gold Group, Inc