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Top Two Gold Forecasters Remain Bearish After 2014 Rally

By Nicholas Larkin, Glenys Sim and Debarati Roy
February 18, 2014 2:15 PM EST 62 Comments
Gold prices began to rebound last month on signs that physical demand in Asia, the biggest buying region, jumped after gold’s 2013 decline. Consumption in China surged 41 percent last year to a record 1,176.4 tons, the China Gold Association said Feb. 10.
Photographer: Brent Lewin/Bloomberg
Gold prices began to rebound last month on signs that physical demand in Asia, the biggest buying region, jumped after gold’s 2013 decline. Consumption in China surged 41 percent last year to a record 1,176.4 tons, the China Gold Association said Feb. 10.

(Corrects date in 24th paragraph. Correction was made on Feb. 24.)

The two most-accurate gold forecasters are holding to their bearish forecasts for 2014 even after the metal posted its best start to a year since 1983.

Futures in New York rose 10 percent in 2014, rebounding from the biggest annual drop in three decades, and reached a three-month high. Holdings in exchange-traded products backed by bullion increased by 3.2 metric tons last week, the most since December 2012, after slumping 869.1 tons last year when prices slid 28 percent.

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“I just see this as a corrective move,” said Robin Bhar, the head of metals research at Societe Generale SA in London and the most-accurate forecaster tracked by Bloomberg in the past two years. “We would still want to be bearish gold,” said Bhar, who expects a fourth-quarter average of $1,050.

Bullion got a boost this year from reports showing the U.S. wasn’t growing as fast as forecast and as lower prices spurred Asian demand, with coin sales rising from America to Australia. Gold’s best forecasters say the rebound won’t last because higher prices will stifle purchases and the Federal Reserve will continue slowing stimulus as the economy strengthens.

The metal will average $1,165 an ounce in the fourth quarter, down 12 percent from $1,318.60 on Feb. 14, according to the median of nine analyst estimates compiled by Bloomberg. Futures closed today at $1,3124.40 today. Even after gold dropped 31 percent from a record $1,923.70 in September 2011, prices are twice the average of 2006.

Not Cheap

“Haven demand plays well when gold is cheap, but it’s no longer cheap,” said Justin Smirk, a senior economist in Sydney at Westpac Banking Corp. and the second most-accurate forecaster tracked by Bloomberg in the past two years. “I’m a little surprised by the volatility in the market, but it really doesn’t change my overall view,” said Smirk, who expects a slide through the year to a fourth-quarter average of $1,020.

The gold rally since Dec. 31 ranked fifth among 24 commodities tracked by the Standard & Poor’s GSCI gauge, which gained 2.4 percent, led by coffee, U.S. natural gas, hogs and silver. The MSCI All-Country World Index of equities, which advanced 20 percent in 2013, fell 0.5 percent this year, while the Bloomberg Treasury Bond Index rose 1.6 percent.

Bullion’s gains will “run out of steam” without a “more meaningful shift” in investor sentiment, Suki Cooper, an analyst at Barclays Plc in New York, said in a Feb. 14 note to clients. Goldman Sachs Group Inc. analysts led by Jeffrey Currie, the head of commodities research in New York, said in a Feb. 12 report that gold will “grind lower” as U.S. growth improves, reiterating a forecast for prices to reach $1,050 by the end of the year.

Bullish Bets

Hedge funds and other large speculators more than doubled their bets on higher prices this year, with a net-long position of 69,291 futures and options contracts as of Feb. 11, from a six-year low of 26,774 on Dec. 3, U.S. Commodity Futures Trading Commission data show. The record was 253,653 in August 2011 as prices approached the all-time high in September 2011.

Investors added 1 ton through gold ETPs in February after cutting holdings for 13 consecutive months, data compiled by Bloomberg show. The value of the funds’ assets climbed to $74.2 billion, from $67.9 billion on Dec. 30. There’s about a 50 percent probability that gold has bottomed, Citigroup Inc. said in a Feb. 17 report. U.S. investors are becoming more positive on gold, UBS AG analysts said in a report yesterday after meeting clients.

Standing Pat

Billionaire hedge-fund manager John Paulson, who cut his holding in the SPDR Gold Trust by half in the second quarter, kept his 10.23 million-share stake in the largest gold-backed ETP unchanged for a second straight quarter in the three months ended Dec. 31, filings showed Feb. 14. The stake is valued at about $1.13 billion.

Gold should climb to $1,400 by the end of the year as the outflow from ETPs slows in the second half, Eugen Weinberg, the head of commodity research at Commerzbank AG in Frankfurt, said Jan. 29. He attributed the rebound this year to faltering equity markets and a drop in real interest rates. The yield on 10-year Treasuries fell to 2.7 percent from 3 percent at the end of December, boosting the appeal of gold as an alternative asset.

The rebound helped revive mining shares. Barrick Gold Corp. (ABX), the largest producer, advanced 19 percent this year to C$22.24 ($20.31) in Toronto, after a 46 percent drop in 2013. The Toronto-based company took $11.5 billion of writedowns last year related to lower bullion prices.

Goldcorp Inc. (GG) rose 31 percent this year after a 37 percent drop in 2013. The Vancouver-based company said last week it had $443 million of fourth-quarter impairments related to lower gold prices.

Physical Demand

Prices began to rebound last month on signs that physical demand in Asia jumped after gold’s 2013 decline. While total gold demand dropped 15 percent last year as investors sold from ETPs, consumers purchased a record amount as China overtook India as the biggest buyer, the World Gold Council said today.

Chinese consumption surged 32 percent last year to record 1,065.8 tons, with global bar and coin purchases climbing to an all-time high 1,654.1 tons, the industry group said in a report. Indian usage rose 13 percent to 974.8 tons in 2013.

Deutsche Bank AG, in a Jan. 31 report, cited “powerful physical flows” to China and India and prospects of a weaker dollar as being supportive for gold. The U.K.’s Royal Mint said Jan. 8 it ran out of 2014 Sovereign gold coins, and mints from Australia to the U.S. reported surges in coin sales.

‘Bargain Hunting’

“There’s some bargain-hunting coming through,” said Bhar, who has covered metals since 1984. “As gold rallies, you’ll probably see physical demand drying up.”

The prospect of weakening currencies in emerging markets will increase the risk of further declines for gold, “given the price-sensitive nature of jewelry demand in local currency terms,” Goldman said in its report last week. India’s currency, the rupee, lost 12 percent of its value against the dollar in the past 12 months.

U.S. retail sales in January fell the most since June 2012, and jobless claims unexpectedly rose last week, government data showed. Fed Chair Janet Yellen said on Feb. 11 the recovery in the labor market is “far from complete” and that bond-buying cuts aren’t on a “pre-set course,” a sign the central bank may retain stimulus measures.

Gold jumped 70 percent from December 2008 to June 2011 as the recession eroded global growth and the Fed pumped more than $2 trillion into the financial system and cut interest rates, raising inflation concerns. Through 2012, bullion gained for 12 consecutive years and prices surged as much as sevenfold.

Interest Rates

The Fed on Jan. 29 left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below the committee’s longer-run goal of 2 percent.

Consumer prices rose 1.5 percent, following a 1.7 percent advance in 2012. Inflation will be 1.6 percent this year, a Bloomberg survey of 88 economists showed.

This year’s economic slowdown probably is temporary and reflects the unusually cold winter storms since December, Federal Reserve Bank of Dallas President Richard Fisher said last week. The U.S. had its coldest January since 2011, government weather data show. The Fed should stick to its strategy of gradually reducing bond purchases, Fisher said Feb. 14 in a Bloomberg Radio interview in Dallas with Kathleen Hays and Vonnie Quinn.

Bond Buying

The Fed cut its monthly bond-buying by $10 billion in each of its past two meetings, leaving purchases at $65 billion, and the central bank “is going to keep on tapering,” Westpac’s Smirk said. Because buying is being reduced slowly, “it’s not such a big shock, so for now, I think the market’s got most of it priced in,” he said.

As long as equities keep rising, investors will take money out of gold and into higher-yielding assets, including stocks and other commodities, Societe Generale’s Bhar said. While the MSCI All-Country World Index of equities is down for the year, the gauge has risen for 10 straight sessions and was up 6.3 percent from a 16-week low set Feb. 4.

“The acceleration in the U.S. economy is continuing,” Bhar said. “Nothing has really happened in terms of Fed thinking, and therefore the dollar will strengthen and yields will go up. These are still dampeners on the gold price. If the whole world is generally getting back to health, and less tail risk, you don’t need a safe haven as such.”

To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Glenys Sim in Singapore at gsim4@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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