Money managers go for the gold in market rout - and beyond

NEW YORK Tue May 25, 2010 6:27pm EDT

Gold bars are displayed at a branch of Mitsubishi Materials Corporation in Tokyo in this October 8, 2009 file photo. REUTERS/Issei Kato

Gold bars are displayed at a branch of Mitsubishi Materials Corporation in Tokyo in this October 8, 2009 file photo.

Credit: Reuters/Issei Kato

NEW YORK (Reuters) - Gold is one of the more mysterious assets in the financial markets. It's volatile at times to the point of inducing vertigo and fans of the precious metal assert, somewhat contradictorily, its prowess as a hedge against both inflation and deflation.

It's also been one of the best investments of the last several years, outlasting the equity bull market and performing well when so many assets have succumbed to big declines.

That's why it's become a key component among the strategies of the world's largest money managers even as it streaks to never before seen heights of roughly $1,250 an ounce hit last week.

"The outlook for gold is very, very strong," Evy Hambro, co-chief investment officer of BlackRock's natural resources equity team, said in a recent telephone interview from London.

BlackRock's assets under management totaled $3.36 trillion, as of March 31.

"Gold is certainly nowhere near as volatile as the moves we've seen in currencies," Hambro added. "Look at the euro!"

On Tuesday, spot gold shot up to a session high above $1,200 an ounce, though a bit off the record $1,248.95 per ounce set on May 14. Against the U.S. dollar, the euro is down 14.2 percent so far this year, while gold is up 9 percent for the same time period, Reuters data show.

Similar to hedge funds, money managers are further adopting gold exposure, by way of gold-linked equities and exchange-traded funds, into their asset allocation strategies despite gold's stomach-churning swoons.

FOLKS WITH THE MIDAS TOUCH

In fact, assets in the popular SPDR Gold Shares ETF on Tuesday hit a record $48.8 billion, according to State Street. This is partially due to the rise in the price of the underlying asset, but also reflects increased investment from ordinary investors looking for exposure to commodities.

Mom and pop investors have shown just that.

Commodity sector funds, with gold exchange-traded funds driving the interest, have attracted nearly $7 billion in net cash over the last four weeks, according to EPFR Global.

Mohamed El-Erian, who as co-chief investment officer helps oversee more than $1 trillion at Pimco, said his firm took some profits off the table last week in the SPDR Gold Shares, but emphasized gold exposure remains "very much" a part of the firm's asset allocation.

The proximate cause for money manager's giddiness over gold?

Festering inflationary pressures stemming from the extensive printing of money by the world's central banks to offset collapsing credit markets and avoid depression-like economies. World central banks have been opening the money spigots to buy securities in emergency measures, such as those the European Central Bank has recently undertaken to stabilize euro-zone government bond markets.

Moreover, the flight into gold reflects investors' concerns about the potential for paper currencies to depreciate because of central banks' looser lending policies. For example, the U.S. Federal Reserve's key policy interest rates are still at near zero percent -- which will lead to inflation.

A GOLDEN CURRENCY

While the dollar is seen by many as preferable to the euro or yen, the extent of U.S. indebtedness worries some who believe more problems face the United States in coming years.

All of this has led prominent hedge fund managers to gold.

"As an investor, I became very concerned about having my assets denominated in U.S. dollars," Paulson said in December during a luncheon presentation in New York. "So I looked for another currency in which to denominate my assets in. I feel that gold is the best currency."

Last fall, David Einhorn of Greenlight Capital also spoke along those lines at an investor conference: "Picking these currencies is like choosing my favorite dental procedure. And I decided holding gold is better than holding cash, especially now that both offer no yield."

Einhorn echoed the sentiment at Greenlight Capital Re's investment meeting last week, saying he still holds physical gold for "we tend to think of gold as a currency." He added: "I think there's going to be a lot of inflation."

Emphasizing the phenomenon of hedge funds' growing skepticism of the creditworthiness of countries, the European Union and the International Monetary Fund announced a nearly $1 trillion bailout for ailing member states to halt potential contagion from the spiraling deficits in the euro zone.

El-Erian put it this way in his latest letter to clients:

"Too many balance sheets deleveraged simultaneously, threatening a global depression and forcing governments to step in with their own balance sheets to arrest an increasingly disorderly process."

(Reporting by Jennifer Ablan; Editing by Jan Paschal)

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