Schroders’ Wyke Sees Gold Bull Market Intact in Bond Selloff

Gold’s bull market is intact and prices will reach a new high as declines in bonds and equities boost demand and investors seek insurance against economic and political risk, according to Schroder Investment Management Ltd.
Bullion tumbled into a bear market in April and is heading for the worst year since 1981 amid concern the U.S. Federal Reserve will taper stimulus and as some investors lost faith in the traditional store of value. Prices touched the lowest since September 2010 last week after Fed Chairman Ben S. Bernanke said the central bank, which buys $85 billion of debt each month, may begin reducing purchases this year and end the program in 2014 should the economy improve further.

“The gold bull market is still intact,” Christopher Wyke, a product manager for emerging-market debt, currencies and commodities at Schroder, said in an interview in London. “The fundamental reasons why people are buying gold are still there. We have economic risk, political and market risks, and gold will provide protection. Although the current correction may not have ended, we believe that the bull market in gold will resume in time and that a new all-time high will be established.”

Gold ETPs

Bullion’s 23 percent slump this year followed 12 years of gains. Investors sold 533 metric tons of gold-backed exchange-traded products this year, reducing holdings to 2,098.605 tons on June 21, the lowest since 2011, data compiled by Bloomberg show.

Gold futures more than doubled from the end of 2008 to the record $1,923.70 in September 2011 as the Fed cut interest rates to a record and bought $2.3 trillion of debt from December 2008 through June 2011. Bullion for August delivery fell 0.5 percent to $1,285.40 an ounce by 11:16 a.m. on the Comex in New York after plunging to the lowest since 2010 on June 21.

The Standard & Poor’s GSCI (SPGSCI) gauge of 24 commodities dropped 6.3 percent this year, the MSCI All-Country World Index of equities gained 1.7 percent and the U.S. Dollar Index added 3.5 percent. A Bank of America Corp. index shows Treasuries lost 2.8 percent.

Selling Bonds

“One of the effects of Bernanke’s comments is the equity markets in many parts of the world will sell off,” Wyke said June 20. “Bonds are selling off already, and there is risk of equities in some markets falling sharply as well. Going to gold as protection is going to become more important as markets are falling.”

Schroder has about $8.1 billion in five commodity funds, including the $302 million Schroder AS Gold and Precious Metals Fund. The gold fund has had “very few redemptions” since the sell-off began, Wyke said. The fund, managed by Paula Bujia, is down 27 percent this year, data compiled by Bloomberg show.

The 32-year-old bull market in bonds has come to an end, and part of the investor money coming out from debt as interest rates rise may go into bullion, Wyke said.

“If interest rates are going up, you don’t want to hold bonds,” Wyke said. “Most investors have far too much in bonds, and I think some of that money will go to gold.”

U.S. Employment

Investors withdrew money from bond funds worldwide this month after Bernanke told Congress on May 22 that the central bank’s policy-setting board could start reducing its bond purchases if the U.S. employment outlook shows sustained improvement. Ten-year Treasury yields climbed today to the highest since August 2011, worsening the sell-off.

Gold may gain even if the dollar strengthens and inflation remains subdued, according to Wyke. Bullion usually moves inversely to the greenback. Expectations for increases in consumer prices, as measured by the break-even rate for 10-year Treasury Inflation Protected Securities, fell 24 percent this year, earlier today extending a decline to the lowest since Oct. 6, 2011.

“Historically, the dollar going down, inflation going up has been good for gold,” Wyke said. “Even if those two things didn’t happen, all the risks the world is facing mean that outlook for gold is good, and the fall in the gold price below $1,300 will provoke demand. People will be able to buy more.”