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Gold Forecasters Splitting on Peak for Bull Market: Commodities

By Nicholas Larkin and Debarati Roy
January 15, 2013 12:38 PM EST 6 Comments
Gold dropped 0.2 percent to $1,672.80 in London this month after rising 7.1 percent in 2012, the smallest advance in four years.
Photographer: Thomas Ernsting/laif/Redux
Gold dropped 0.2 percent to $1,672.80 in London this month after rising 7.1 percent in 2012, the smallest advance in four years.

Danske Bank A/S and Credit Suisse Group AG, the most-accurate gold forecasters, say prices will probably peak this year while their nearest rival, UniCredit SpA, sees no end in sight to the 12-year bull market.

Gold will average $1,720 an ounce this year and $1,600 in 2014, said Christin Tuxen of Danske Bank in Copenhagen, who came closest to predicting moves in the past eight quarters, according to data compiled by Bloomberg. Tom Kendall at Credit Suisse in London expects $1,740 and $1,720 and Jochen Hitzfeld of UniCredit in Munich predicts $1,700 and $1,800. Bullion rose more than sixfold since the bull market began in 2001.

All three forecast record average prices this year because central-bank stimulus will sustain buying as a hedge against inflation and currency devaluation. Danske and Credit Suisse predict lower prices in 2014 as economic growth curbs demand for the metal as a protector of wealth while UniCredit says record- low interest rates will maintain gold’s allure.

“Gold will definitely continue to rise but the euphoria has subsided,” said Donald Selkin, the New York-based chief market strategist at National Securities Corp., which manages about $3 billion of assets, including gold. “The track record is great but this year it will take a breather.”

Investors bought $141.9 billion through exchange-traded products since gold’s longest bull market in at least nine decades, creating a hoard bigger than the official reserves of all but two nations. Prices have retreated for three successive months as Europe’s debt crisis eased and faster growth from the U.S. to China spurred speculation that central banks will pare back stimulus.

Smallest Advance

The metal advanced 0.5 percent to $1,684.12 in London this month after rising 7.1 percent in 2012, the smallest advance in four years. The Standard & Poor’s GSCI gauge of 24 commodities gained 1.2 percent since the start of January and the MSCI All- Country World Index (MXWD) of equities added 3 percent. A Bank of America Corp. index shows Treasuries lost 0.4 percent.

The top six gold and precious-metals analysts tracked by Bloomberg Rankings remain bullish for this year, with a median forecast for prices to reach a record $1,997.50 by December. Bloomberg currently tracks the predictions of 26 analysts.

Prices retreated to a four-month low Jan. 4 after Federal Reserve minutes showed some policy makers favored ending $85 billion in monthly bond purchases this year as the recovery gains traction. The U.S. will accelerate from the second quarter through the end of 2013, economists’ forecasts compiled by Bloomberg show. Gold surged 70 percent as the Fed bought $2.3 trillion of debt from December 2008 through June 2011.

Interest Rates

“When the Fed stops easing and economic activity improves, that will weigh on gold,” said Tuxen of Danske Bank. “We’ll start to see that being priced in in the second half.”

Record-low interest rates and yields below the rate of inflation on sovereign debt may sustain demand for bullion, which generally only earns returns for investors through price gains. The Fed said rates would stay close to zero as long as unemployment remains above 6.5 percent and inflation projections are for no more than 2.5 percent. The jobless rate held at 7.8 percent last month and consumer prices gained 1.8 percent in November from a year earlier. The European Central Bank held rates at an all-time low of 0.75 percent on Jan. 10.

“The most important factor is negative real interest rates and we see no end in sight there for the next couple of years,” said Hitzfeld of UniCredit. “What is dangerous is if key interest rates rise the above inflation rate, but this isn’t anywhere in sight.”

Soros Buys

There are no signs that the biggest investors are selling bullion. Soros Fund Management LLC, founded by the billionaire George Soros, raised its stake in the SPDR Gold Trust (GLD), the biggest gold ETP, by 49 percent in the third quarter to $215 million, U.S. Securities and Exchange Commission filings show. Paulson & Co. remained the biggest shareholder, with a stake now valued at $3.56 billion. John Paulson bet against the subprime mortgage market, becoming a billionaire in 2007.

Global ETP holdings stand at 2,620 metric tons, about 0.5 percent below the record set Dec. 20, data compiled by Bloomberg show. Since the first product was created by Graham Tuckwell and listed in Australia in 2003, the asset class accumulated more metal than the country’s mines produced in a decade. Only the U.S. and Germany hold more in official reserves.

Gold’s allure may weaken after the prospect of improving corporate profits drove global equities to a 20-month high Jan. 14. U.S. manufacturing rebounded in December from a three-year low the month before and sales of new homes rose to the highest level in more than two years. China’s factory output expanded in December at the fastest pace in 19 months and Luxembourg Prime Minister Jean-Claude Juncker said last week that “the worst is over” for Europe’s financial crisis.

Economic News

“If you are long gold you better hope for bad economic news,” said Michael Shaoul, the chairman of New York-based Marketfield Asset Management, which oversees about $4.5 billion of assets. “We have had a good six months of economic data in U.S. and Europe is surprising people with how quickly it is healing itself. The long-term rally is under more pressure.”

Analysts are less bullish than last year. Morgan Stanley cut its forecast for this year to $1,853, from $2,175 in May, and Deutsche Bank AG and BNP Paribas SA reduced their 2013 outlook by at least 12 percent since last year, data compiled by Bloomberg show.

JPMorgan Chase & Co. ended a recommendation to hold gold on Jan. 4, saying it may advise investors to buy again once prices decline to $1,550. While Goldman Sachs Group Inc. is still forecasting a 2014 average of $1,750, or 3.9 percent more than now, the bank reiterated in a report Jan. 13 that prices probably will peak this year.

Inflation Adjusted

Hedge funds are also paring wagers on a rally, cutting bets by 54 percent since October. They held a net-long position of 92,115 contracts in the week to Jan. 8, the lowest since August, U.S. Commodity Futures Trading Commission data show.

“Gold’s still going to have a very solid role as a diversifier in portfolios,” said Kendall of Credit Suisse. “It’s the more shorter-term speculative investors who are going to gradually drift away from gold.”

Bullion failed to set a new record last year for the first time since 2007, rising to within 6.5 percent of the all-time high of $1,921.15 reached in September 2011. It’s also yet to exceed previous all-time highs when adjusted for inflation, with its 1980 peak of $850 equal to $2,398 today, data compiled by the Fed Bank of Minneapolis show. The size of the futures market, based on contracts outstanding, contracted about 32 percent since November 2010, Comex data show.

Options Traders

Options traders are divided, with the most widely held contract conferring the right to sell at $1,600 this month, while the next most popular contract gives owners the right to buy at $2,100 by March, Comex data show.

Gold’s 12 consecutive annual gains have been matched by few other assets. U.S. Treasuries provided positive returns for at least 16 years through 1993 and Bank of America’s Global Broad Market Index of bonds advanced every year since 2000. The Stanley Gibbons 100 Stamp Index, which tracks prices for the 100 most-frequently traded stamps, climbed for 13 successive years through 2011, extending the rally though August last year.

The best run of annual gains for the S&P GSCI gauge of commodities was six years through 2007, while the MSCI All- Country World Index of stocks advanced for seven years through 1999. The best streak for the U.S. Dollar Index, a measure against six major trading partners, was five years through 1984.

Bullion Market

Some investors are still bullish because the euro area remains mired in recession and Japan said Jan. 11 it will spend 10.3 trillion yen ($116 billion) to end deflation. Nineteen of 23 analysts and traders surveyed by the London Bullion Market Association expect record average prices in 2013 and a high of $1,914, the association said last week.

The U.S. Mint sold 110,500 ounces of American Eagle gold coins so far this month, compared with December’s total of 76,000 ounces, data on its website show. Nations from Brazil to Iraq to Russia are buying metal to add to official reserves. Governments and central banks will buy 300 tons this year and the same amount again in 2014, Barclays Plc estimates.

Barrick Gold Corp. (ABX), the largest producer, will report a 36 percent gain in profit to a record $4.83 billion this year, the mean of 10 analyst estimates compiled by Bloomberg shows. The Toronto-based company’s shares will gain 40 percent in the next 12 months, according to the average of 23 analyst forecasts compiled by Bloomberg.

“While the rise may not be parabolic, we will see higher trading,” said Peter Sorrentino, who helps manage about $14.7 billion of assets at Huntington Asset Advisors in Cincinnati. “The money from all that easing is out there. The depreciation and loss of purchasing power will continue to manifest itself as we go forward.”

To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net

To contact the editors responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net; Steve Stroth at sstroth@bloomberg.net

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