By Kitco News
Tuesday February 21, 2017 12:28

(Kitco News) - The gold market, holding near three-month highs, could have more potential as a recent survey shows a record number of fund managers see the yellow metal as undervalued.

In the latest Bank of America Merrill Lynch fund manager survey, released last week, one third of respondents said that gold was the best hedge against protectionism. At a same time, with a net margin of 15%, respondents said that the yellow metal was undervalued. This is only the second time investor sentiment has reached this level, tying the record first set back in January 2008.

The results of the latest survey of 175 money managers, collectively controlling assets of more than a trillion dollars, comes as gold prices hold near three-month highs. Gold prices last traded at $1,238.10 an ounce, relatively flat on the day.

Along with growing concerns of global protectionism, according to the survey, fund managers are also concerned about rising inflation and stagflation threats, viewing gold as a safe-haven asset.

Not only does gold have the potential to move higher, but the survey also showed that fund managers are cooling on the U.S. dollar. The survey showed that 41% of respondents viewed a long-U.S.-dollar strategy as the most overcrowded trade. The second most overcrowded trades, at 14%, was shorting government bonds.

Although sentiment in the gold market is starting to improve, money managers have been fairly reluctant to actually add positions. According to trade data from the Commodity Futures Trade Commission, net-long gold positions are still relatively muted compared to previous years. For the week ending Feb. 14, the latest trade data showed that money managers are net long gold by 63,625 contracts, well below the five-year average and down more than 76% from the record highs seen in July 2016.

However, the participants noted that the yellow metal still faces some challenges, in particular growing optimism over the global economy, which is expected to continue to support equity markets. According to the survey, 23% believe that the U.S.  economy will see above-trend growth in 2017, up significantly from only 1% of respondents during the same time last year. In total, 59% see global growth moving higher.

At the same time, the doom and gloom sentiment is also shrinking with only 43% of respondents saying there is a risk of secular stagflation, down from 88% last year.

Optimism Growths Despite Doubt Surrounding President Trump’s Economic Proposals

The survey showed that investor optimism is not solely based on the new Donald Trump administration. Only 23% of respondents said that they expected Trump’s proposed tax cuts to happen before Congress takes a summer recess in August. At the same time, 30% of respondents don’t see the proposals enacted until 2018.