UBS urges clients to buy gold - we already are say investors

The necessary conditions have been satisfied and it is time to invest in gold once more; while ETC flow suggest interest in commodities has returned.

LONDON - 

UBS Commodity Strategist John Reade has put out a note today urging clients to "Buy Gold". He is recommending that investors buy gold with an initial target of $850 (the fix on the morning of 28^th August was $833.50), which is also the UBS one-month forecast price, with further gains expected "towards $900 and beyond".

The three factors that UBS has been monitoring in order to take this tactical stance have been the following:

Investment positioning

Fundamental demand

The dollar

Investment: there has been substantial long liquidation on COMEX, TOCOM and the OTC markets. The historical Commitment of Traders figures from the CFTC show that the commercial and non-reportable speculative position on COMEX had contracted by Tuesday 19^th August (the next figures, for the 26^th, are not released until after the close of business on Friday 29^th) to 405 tonnes, which is the lowest since September 2007. Interestingly UBS notes that the last time the bank made a strong tactical recommendation in gold was August 2007, when the metal was trading at $600/ounce, pointing out that the subsequent price performance demonstrates the potential for the metal when the three above factors fall into place. The speculative long was at its most extended in mid-July, when it hit a record 767 tonnes and over the subsequent five weeks it declined by 47% or 362 tonnes. On TOCOM the non-proprietary positions on the Exchange have declined by almost 20% since mid-July while there is considerable evidence of sizeable liquidation in the global Over the Counter market.

Holdings in Exchange Traded Funds have, by contrast, been comparatively stable, losing 37 tonnes or 4% of their combined holdings. Since the date when the COMEX long topped out (15^th July) there have been increases in two of the major instruments (the Exchange Traded Security in London and the ZKB Fund in Zurich have increased their holdings by 23% and 13% respectively), while the majority of the other funds have seen some attrition. The largest fall in terms of tonnage was in the major fund, the New York StreetTRACKS fund, which has contracted by 51 tonnes or 7%; the falls in the other funds were much smaller, with a combined decline of less than four tonnes. The volume held in the Australian fund has remained unchanged.

Over and above this, ETF Securities Ltd., which operates the trading platform for the gold ETC (and a substantial number of other commodity-related ETCs) in London has reported that the ETCs have been experiencing strong flows of funds over the past fortnight, especially into the broad ETCs, suggesting that that there has been a shift in sentiment towards commodities, largely on oversold considerations. The gold ETC enjoyed its tenth consecutive weekly rise in the week to 22^nd August and since mid-July the flows into this fund have reached $306 million.

Back at UBS the Bank states that it has seen "unprecedented" gold demand from India, from European consumers and from other Asian clients, that demand is very strong in Turkey and the Middle East and that it should pick up in Italy as of early September as the holiday season draws to a close. UBS is not alone in seeing this interest, with some Indian jewellers having to turn away clients and, with the Wedding and Festival seasons imminent, demand is expected to remain robust for the next few weeks. Diwali (the Festival of Lights, which is a very important Hindu Festival, the largest gift-giving and shopping festival in India and most popular for gold purchases, falls this year on 28^th October.

Other parts of Asia are trading at premia of more than $1 over London, and the US Mint has had to ask dealers to suspend their orders for one-ounce Eagles in late August and only reinstating orders a week later, and on an allocated basis. Orders for Eagles in August have been running at three times the levels of January-July.

The final component the UBS cocktail is the performance of the dollar and the bank's head of FX Technical Strategy has issued a sell recommendation on the dollar. This view would seem subsequently to have been bolstered by the suggestions from senior members of the European Central Bank that, despite a slowing in economic activity, rate cuts are not likely in the foreseeable future.

September approaches, and with it the seasonal upturn in gold demand. The mini gold-rush experienced in major consuming nations over the past couple of weeks has prp-empted that to a degree, but the elements are in place for renewed strength in gold and UBS has nailed its colours to the mast.

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