UBS recommendation fails to lift gold
By Javier Blas in London , Financial Times, 10 Mar 2009
UBS told investors on Tuesday to increase the weight of gold in their portfolios, warning that bullion prices could soar because the prospects of either deflation or inflation were "becoming more extreme".
The Swiss bank, one of the most active gold dealers, warned of "a potential upside of $2,500 an ounce" as some hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.
"The current environment is one which can best be characterised as having a 'low margin of error' for central bankers; with the prospects for deflation or inflation as becoming more extreme," said Daniel Brebner, an analyst at UBS in London.
"Given the broad uncertainties in the current macro climate we believe that investors should look to gold given its historic tendency to act as a hedge against these risks."
In London, spot gold prices on Tuesday were lower as jewellery demand, traditionally the backbone of gold consumption, remained lacklustre.
Bullion fell to $910 a troy ounce, down from Monday's last quote in New York of $920.95 an ounce.
A bet on gold is essentially a bet against all paper currencies. The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital, who last year came under the spotlight for his short selling of shares in Lehman Brothers, after arguing that the bank did not have enough capital to offset its exposure to falling property prices. Other funds looking at gold include Eton Park and TPG-Axon, investors said.
UBS said that downside risks to gold prices were limited to about $500 an ounce, or less than 50 per cent below the current price, while the upside risk was for a surge of 170 per cent above current prices, to trade at $2,500 an ounce.
Other commodities markets were mostly higher on Tuesday, with oil consolidating its recent gains. Nymex April West Texas Intermediate rose 56 cents to $47.63 a barrel while Brent moved 99 cents higher to $45.12 a barrel.
Olivier Jakob, of Swiss-based consultancy Petromatrix, said that while WTI continued to make a steady advance upwards, it was starting to enter the stronger resistance area of the $50 mark and the technical level of the 100 day moving average at about $48.
In spite of the rise in oil prices, natural gas prices moved lower. Nymex April natural gas fell to $3.826 per million British thermal unit, down 3.9 cents on the day. On Monday, natural gas prices hit an intraday low of $3.809, the lowest since late 2002.
On the London Metal Exchange, base metals were mixed, with copper, the bellwether of the sector, posting a 1 per cent increase on the day to $3,600 a tonne. Copper stocks at LME warehouses fell 3,325 tonnes to 518,700 tonnes, continuing the downward trend seen in the past 10 days.
Agriculture commodities moved higher ahead of this week's monthly report on supply, demand and inventories from the US department of agriculture. CBOT March corn rose 3 cents to $3.60 ¼ a bushel while CBOT March soyabean rose 11 ½ cents to $8.92 ½ a bushel. The rise was capped by concerns about the economic crisis impact on agriculture commodities consumption, particularly in the livestock sector.