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Gold loses allure as stocks rally; Yamada is unfazed

Gold lost its luster in December, confounding analysts and investors who predicted the metal would lead the commodities markets in 2007.

The price of gold fell 1.7%, ending the year at $636.70 an ounce, after more than 80% of the participants in a Bloomberg survey said they were bullish as the month began. Investors would have been better off in stocks; the Morgan Stanley Capital International World Index rose 2% in December. „It appears gold is running out of steam,” said Ralph Preston, a commodity analyst at Heritage West Financial Inc., a futures brokerage in San Diego, California, who was a gold bull on December 4 and a bear by December 25. „I'm not going to have another buy signal until it closes decisively above $665.
There isn't a reason to drive the market higher at this point.” Investors who purchased gold last year as a haven from rising prices, the dollar's decline and concerns over the nuclear intentions of Iran and North Korea were frustrated at yearend as US inflation slowed, the currency rebounded from its lows against the euro and the Dow Jones Industrial Average rose above 12,500 for the first time. „We have been disappointed with gold's movement,” said Christoph Eibl, who sold some gold from his $700 million of holdings at Tiberius Asset Management AG in Zug, Switzerland in November. „The arguments were around for a higher gold price and it didn't perform.”

An investor who sold $1 million of stocks on December 1 to buy the precious metal would have lost about $37,000 by the end of the month, based on the MSCI World Index and the drop in gold's spot price from $648 an ounce at the end of November. Gold fell $1.20, or 0.2%, to $639.30 an ounce at 8:53 a.m. in London today, the first decline since December 25. „If you had to pick a year where gold would tend not to be a glittering asset, 2007 would be a good one fundamentally,” said Brent R. Harris, who helps manage $60 billion, including the $13.4 billion Commodity Real Return Strategy Fund, for Pacific Investment Management Co. in Newport Beach, California. The most optimistic gold investors haven't changed their views, noting that the metal gained 23% last year, trouncing the 13.6% increase in the Standard & Poor's 500 Index. Prices will reach $664 an ounce in 2007, according to the average forecast of 39 analysts, traders and investors surveyed by Bloomberg News December 27 and December 28.

Louise Yamada, managing director of Yamada Technical Research Advisors LLC in New York and the former head of technical research at Citigroup Inc., sees gold surpassing $730 this year on its way to $3,000 within a decade. She cites the metal's inverse relationship to the dollar as a „consistent” reason to buy.” If it fell below $600, that would just mean we're going to have a longer repair process,” said Yamada, voted Wall Street's best technical analyst from 2001 to 2004 in surveys by Institutional Investor magazine. „At the moment, $600 is a good support level.” Even after rebounding 0.4% against the euro in December, the dollar may extend declines as economic growth sputters, investors still say. The US economy in the third quarter expanded at the slowest pace of 2006, the Commerce Department said December 21. US homebuilding, while showing signs of bottoming, had its biggest drop in 15 years. Gold gained in five of the past six dollar bear markets. A decline in the dollar increases gold's value because the metal is priced in the US currency.

The debate about gold illustrates the fluctuations in commodities markets in 2006. While nickel more than doubled and corn climbed 81%, natural gas tumbled 44% and the Reuters/Jeffries CRB Index of commodities dropped 7.4%, the first annual decline in five years. December's drop in gold was „normal volatility,” says Graham Birch, who helps manage $7 billion in gold equities at BlackRock Investment Management in London. „There is no surge in supply out there and the demand picture I think looks quite reasonable,” said Birch, who expects prices to reach $732 an ounce this year. Global gold output in the nine months ended September 30 fell 2.2% to 1,804 metric tons from a year earlier, according to London-based researcher GFMS Ltd. Gold bears say one reason for selling is that the bulls have become too confident.

72% of those surveyed by Bloomberg from Sydney to Chicago December 27 and December 28 recommended gold, and a record high 83% did a month earlier. The survey showed a slump in support in the week of December 21 and December 22 to 38%. Bloomberg's survey accurately forecast the direction of prices in 85 of 140 weeks, or 61% of the time. Gold returned 6.4% in the three weeks following readings of 70% or higher in the weekly survey, compared with 12.2% when the index was 30% or lower.
Traders often use extreme sentiment readings as an indication prices have gone too far and will reverse. „People were too bullish,” said Dennis Gartman, a trader, economist and editor of Suffolk, Virginia-based Gartman Letter. „Judging from the level of excitement at various gold conferences, that's when you know prices are getting a little sporty.” Gartman says gold will extend its annual gains, citing purchases of the metal by central banks.

While gold doubled since dropping to a 20-year low in 1999 and rose as much as 38% this year, stocks did better since the end of January, according to data compiled by Bloomberg. Gold peaked at a 26-year high of $730.40 an ounce on May 12, and then fell 11% by the end of the year. The MSCI World Index gained 8% in the same period. „People are more confident in the stock market than they are in gold,” said Bernard Sin, chief gold trader at Geneva-based MKS Finance SA, one of Switzerland's four gold refiners. „A lot of people got it wrong” last month.
Hedge-fund managers and other large speculators decreased their net-long position in Comex gold futures by 2.6% in the week ended December 26, the third straight weekly decline, according to US Commodity Futures Trading Commission data. Inflation expectations are easing after oil prices fell 21% from a record high of $78.40 a barrel July 14 and the US Federal Reserve completed 17 increases in the target rate for overnight loans between banks. The European Central Bank raised rates six times and the Bank of Japan lifted its overnight rate for the first time since 2000 last year.

Gold „just doesn't have a great feeling,” said John Meyer, an analyst at Numis Securities Ltd. in London who was positive on gold as recently as last month and has since turned into a bear. Oil prices are „likely to come back down,” reducing demand for an inflation hedge, he said. The US Commerce Department's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure of inflation, climbed 2.2% in November compared with a year earlier.
It was the smallest year-over-year increase since May. For Frederic Lasserre, head of commodities research at Paris-based Societe Generale, that only means lower prices for commodities, including gold. „Commodities experienced a speculative bubble between the second half of 2005 to the first half of 2006,” said Lasserre, who sees gold falling below $500 an ounce this year. „What we are expecting right now is the beginning of the burst of this speculative bubble.” (Bloomberg)