Top gold forecasters still bearish after rally

Even after the metal posted its best start to a year since 1983, some remain bearish

Feb 18, 2014 @ 10:21 am (Updated 10:56 am) EST

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 rose 9.7% in 2014 through last Friday, 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%.

“I just see this as a corrective move,” said Robin Bhar, the head of metals research at Société Généralé SA and the most-accurate forecaster tracked by Bloomberg in the past two years. “We would still want to be bearish gold,” said Mr. 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 last Friday, according to the median of nine analyst estimates compiled by Bloomberg. Futures traded at $1,319.90 Tuesday. Even after gold dropped 31% 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 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 Mr. 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 1.5%, led by U.S. natural gas, coffee, hogs and silver. The MSCI All-Country World Index of equities, which advanced 20% in 2013, has fallen 0.8% this year, while the Bloomberg Treasury Bond Index has risen 1.6%.

Bullion's gains will “run out of steam” without a “more meaningful shift” in investor sentiment, Suki Cooper, an analyst at Barclays PLC, said in a note to clients last Friday. Goldman Sachs Group Inc. analysts led by Jeffrey Currie, the head of commodities research, said in a report last Wednesday 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.

Investors added one 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% probability that gold has bottomed, Citigroup Inc. said in a report Monday. U.S. investors are becoming more positive on gold, UBS AG analysts said in a report yesterday after meeting clients.

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, 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% from 3% at the end of December, boosting the appeal of gold as an alternative asset.

The rebound helped revive mining shares. Barrick Gold Corp., the largest producer, advanced 21% this year to $20.68 in Toronto, after a 46% drop in 2013. The company took $11.5 billion of writedowns last year related to lower bullion prices.

Goldcorp Inc. rose 32% this year after a 37% drop in 2013. The company said last week it had $443 million of fourth-quarter impairments related to lower gold prices.

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% 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% 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 had run out of 2014 Sovereign gold coins, and mints from Australia to the U.S. reported surges in coin sales.

“There's some bargain-hunting coming through,” said Mr. 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% 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 Chairman 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% 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.

(Bloomberg News)

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