As China Looks to Spend, Gold Market May Benefit

State Street Corp. Chief Executive Ron Logue is an unlikely Goldfinger.

But his Hub funds giant has already accumulated $2.4 billion in gold in 8 months to back its new GLD exchange-traded fund. That makes it by far the biggest gold fund in the world, according to the London-based World Gold Council.

Despite a slow May, GLD has taken $1.2 billion in new investment so far this year. The data comes from Hub analytics firm Financial Research Corporation.

Net asset value per share: $42.51, or a tenth of an ounce.

Gold hasn’t moved much this year in dollars, but that’s only because the dollar – for once – is rising. Against other currencies, such as the euro, its surging.

What’s going on? Wasn’t gold supposed to be dead as an investment?

Part of the answer lies in Asia.

The Chinese government simply doesn’t know what to do with all its money.

The country’s trade surplus has left it with $659 billion in foreign exchange reserves. That’s up an awesome $220 billion in the past year alone. China could overtake Japan as the world’s largest holder of foreign reserves next year.

Toss in Taiwan, Hong Kong, Korea, India, and Singapore, and the big Asian central banks are now sitting on $2.3 trillion in reserves. Every month that America runs a trade deficit it rises by tens of billions.

So far the banks have kept most it in dollars. But they’re up to their eyeballs in Treasuries.

China is bidding for U.S. equities, including Unocal and Maytag. But that still keeps them overexposed to a single currency.

If they want to diversify, they have limited options. Euros? Soybeans? Baseball cards?

Gold investors are betting they’ll move at least a small amount into gold.

Maybe they will, maybe they won’t. But it wouldn’t take much to send the price skyward.

Consider this. According to the World Gold Council, about 106 million ounces of gold come onto the market each year. That includes everything from melted-down old jewelry to the 80 million or so ounces dug out of the ground.

Total value at today’s prices: about $45 billion … or just 2 percent of the cash held by Asia’s central banks.

For $60 billion, or 3 percent of their money, they could buy the ten biggest companies in the Philadelphia Gold & Silver Index, and gain the rights to most of the world’s future production.

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Margie Patel is off to a good start. Over the winter Pioneer’s high yield or "junk" bond star launched her first equity fund. The results so far: She’s up 9 percent since January.

The rise in the Standard & Poor’s 500 index over the same period: less than 4 percent.

Patel’s Pioneer Equity Opportunity has only taken in a mere $35 million in assets so far, according to FRC.

But it looks as if this equity fund addition to her portfolio came none too soon. High yield funds are falling out of fashion: Customers have yanked $1.4 billion out of Patel’s Pioneer High Yield so far this year, or nearly one fifth of assets. Withdrawals in May alone were $182 million.

That’s on top of the half billion pulled out last year. Gone are the halcyon days of 2002 and 2003, when nearly $6 billion poured in.

Pioneer notes most rivals are suffering too. "We are at or below the industry average in terms of the redemption rate," said spokesman Geoff Smith.

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Three trading days, and share options are already cheaper than they were before the London bombings. Prices, as measured by the Volatility Index, reflect market uncertainty. Are investors being calm, or complacent?