21st June 2013
Gold traders are at their most bearish for more than three years as the price of bullion slips to its lowest level since 2010 according to Bloomberg and experts predict further declines in the ‘safe-haven’ asset are a real probability writes Philip Scott.
Ben Bernanke, chairman of the US Federal Reserve announced this week that he was gearing up to taper back his $85 billion monthly bond buying programme, dubbed quantitative easing, this year and possibly closing it altogether in 2014.
Following his comments, the gold price fell back below $1,300 an ounce for the first time since September 2010 on Thursday.
Fifteen analysts surveyed by Bloomberg forecast that the price of the precious metal will fall next week, with six bullish and five neutral, the largest proportion of bears since January 2010. Gold is now on track to notch up its first annual drop since 2000.
Gold may drop to $1,250 in a month, UBS AG wrote in a report while Ric Deverell, head of commodities research at Credit Suisse Group AG, said prices will probably fall to about $1,100 in a year reports Bloomberg. Nouriel Roubini, professor of economics and international business at New York University, has forecast a decline toward $1,000 by 2015. The metal reached a previous record of $1,921.15 an ounce.
Speaking to Bloomberg, Frederique Dubrion, chief investment officer of Blue Star Advisors, which manages metals and energy assets said: “The comments by the Fed are really the last signal for the soft hands that the bull market in gold is ending. One of the appeals of gold, especially since 2008, was because of quantitative easing. That they are going to slow down the pace of purchasing is not a good signal for gold.”
The financial crisis saw the price of bullion, already in the midst of a bull market, accelerate. But it has endured severe volatility so far in 2013. In April this year, it suffered its biggest sell-off in more than three decades, taking some $1trillion off the value of reserves.
A number of theories in regards to the fall were put forward, one was that investment banking giant, Goldman Sachs, recommended clients go ‘short’ bullion, essentially bet against further rises for the time being as it cut its long-term forecast for the precious metal.
A major reason behind the fallout in gold is the continued strengthening of the US dollar on the back of better economic data coming out of the US; and traditionally bullion is a hedge against the greenback.
Gold traded at $250 per ounce in the year 2000. In the next eight years the global economy grew at rapid rates, most asset classes and all commodity prices rose dramatically. Gold’s price, nevertheless, rose to $900 at the beginning of the financial crisis in 2008. On the back of this issue, Angelos Damaskos, fund adviser to the Junior Gold fund says: “The notion, therefore, that gold is now overvalued given that, according to the Federal Reserve Chairman, the global economy is stable, even if it is not expected to grow at its long-run sustainable rate for long time, is deeply flawed.
“There are many potential risks remaining, from the unstable Eurozone to an undercapitalised banking sector, to geo-political instability at important areas. Gold, thus, should be trading higher, not lower under the circumstances. The problem is, nevertheless, that today’s markets are too focused on the central bank actions to think rationally making them unable to value asset classes according to fundamentals. Markets can become unclear for long periods of time, during which they tend to overshoot or undershoot fundamental valuations. When they do revert back to the mean, however, they can do so violently and rapidly, and we expect such an adjustment is likely for both the gold price and gold mining stocks in due course.”
Speaking to Mindful Money earlier this month, Evy Hambro, manager of the BlackRock Gold & General fund, said: “It is always impossible for anyone to predict what gold will do in the short-term. In April, the price fell in the face of strong fundamentals, driven by moves in the paper market, in other words, investors were shorting gold, and this helped to push the price down. An over-riding theme is the US economic recovery. When the dollar is weak gold is strong and vice versa and the recovery is pushing the price of the dollar back up.”
But Hambro believes the long-term story for bullion remains intact. He added: “The fundamental indicators are there. We are continuing to see demand from central governments and from the jewellery market. Overall we would expect prices to trend higher. But the stronger dollar, driven by the recovery in the US economy is a headwind.”