Source from (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2013/4/13/business/12957906&sec=business
Published: April 14, 2013
Appetite for the precious metal seems to have diminished, leading to many analysts casting a bearish outlook on its prices
GOLD is to many investors what diamonds are to girls best friend.
For one thing, gold can help preserve one's wealth in tough times, and for another, it helps to maintain one's purchasing power from being eroded by inflation, and it offers good protection against depreciation in a currency's value.
But there are times when investors just do not want to hang onto this perceivably reliable “best friend” that much, as it seems to be happening of late, whereby some investors might just have had enough of gold already.
Appetite for the precious commodity have waned as some semblance of stability returns to the global economy, whereby fears of high inflation seem to have diminished, and the US dollar has strengthened. This is evident in the declining trend of gold prices over the last few months.
In fact, the short-to-medium-term outlook for gold prices remains bearish as demand for the precious metal as a so-called “safe-haven investment” is expected to remain weak. Analysts reckon that investors now are more willing to invest in riskier assets given the improved global economic outlook, especially that for the US economy.
“The bearish undertone comes from gold losing its investment appeal to other financial assets,” explains Singapore-based Phillip Futures Pte Ltd's commodity analyst Joyce Liu.
“As the economy picks up, consumers and corporations are pulling funds out of gold investments, which typically outperform during downturns, but do not pay dividends, and have now become less attractive than other assets, into longer-term investments,” she tells StarBizWeek.
According to Liu, the safe-haven status of gold is more tied to the US economy than any other economy. She says an improving US economy is a huge bear to investment demand for gold.
“Despite last week's disappointing (US) job data, the overwhelming sentiment is still that of optimism in US economic recovery,” Liu points out.
The rising optimism in the US economy comes especially after the world's largest economy was found to have grown at an annual rate of 0.4% during the fourth quarter of 2012, instead of at a previous estimate of a 0.1% growth and an initial reading of a 0.1% decline.
Economists are now forecasting stronger growth of 2%-2.5% for the US economy in the first quarter of 2013, and they expect growth to remain fairly solid through the year.
The downbeat tone
Gold has had a spectacular run up the charts for more than a decade already. But things seem to be changing now.
As some experts see it, the gold rush is over at least for the medium term.
Several renowned global financial institutions such as Credit Suisse Group AG, Goldman Sachs Group Inc, Nomura Holdings Inc, Deutsche Bank AG, UBS Ag, and Socit Gnrale SA (SocGen) have already turned bearish on gold in recent weeks, and cut their gold-price forecast for 2013 and 2014.
But of the many new reports on gold market, the one that has caught the most attention is that by Paris-based SocGen, as it comes with a considerably more bearish outlook compared to the rest.
In its recently published report entitled, “The End of the Gold Era”, SocGen says it expects gold prices to plunge by 15% to US$1,375 (RM4,180) an ounce by the end of this year. This represents a significant deviation from the Bloomberg consensus view that gold would end the year at US$1,750 an ounce.
On average, gold prices based on SocGen's prediction should be around US$1,500 an ounce over the course of 2013 and US$1,400 next year.
SocGen points out that its expectations for rising interest rates on account of improving US economy as well as the strengthening of US dollar could spell a “perfect storm” to start a longer-term bear market for gold.
It argues that the bearish trend for gold prices has already intensified in the past few months, as evidenced by the heavy redemptions in gold exchange traded funds (ETFs) and the increasing willingness of managed money investors to trade from the short side. It points out that since the beginning of 2013, gold ETFs have already dumped about 140 tonnes of gold, with the largest monthly outflow being recorded in February.
According to Credit Suisse, while gold ETFs selling could pause in the near term, there is a danger over the longer term that the significant reduction in ETF positions could become self-reinforcing, that is, outflow negatively affecting sentiment and prices, and leading to further selling.
Game changer
Credit Suisse recently cut its average gold price forecast by 9.2% to US$1,580 an ounce for 2013 and 12.8% to US$1,500 per ounce for next year.
Over the week, Goldman Sachs cut its gold price forecast for the second time in less than two months, citing improving growth prospects for the US economy and recent poor performance of gold prices on heavy selling.
Goldman Sachs now says it expects gold prices to average at US$1,545, instead of an earlier forecast of US$1,610 an ounce, for 2013. For 2014, it now expects gold prices to average at US$1,350 an ounce, instead of US$1,490 an ounce.
The bank's year-end targets for gold are US$1,450 an ounce in 2013 and US$1,270 an ounce in 2014.
Nomura in a recent note argues: “For the first time since 2008, the investment environment for gold is deteriorating as economic recovery, rising interest rates and still benign Western inflation (for now) will likely leave some investors rethinking their cumulative US$240bil investment in gold over the past four years.”
The Japanese investment bank has already cut its 2013 average gold price forecast to US$1,602 an ounce from US$1,981 an ounce, and its 2014 forecast to US$1,750 an ounce from US$1,800 an ounce.
Spot gold on Thursday afternoon was traded at around US$1,560 an ounce. This represented a loss of around 7% from the start of the year, and 13% from the peak in October 2012.
For Singapore-based commodity expert Dar Wong, the recent decline in gold prices is just a “natural correction”, as they had been “too strong” previously.
According to Wong, technical indicators confirm that a bearish trend has set in for gold. He, however, remains doubtful that gold prices would fall below US$1,550 per ounce, which he says, is the crucial support level for the precious metal.
“We think bargain-hunting could set in when gold prices near its crucial support level,” Wong argues.
“We believe central banks will come in to support gold prices,” he explains, stressing that central banks around the world, which have been stocking up gold over the last decade to diversify their portfolio, will unlikely let gold prices fall below the crucial US$1,550 per ounce level, as that could have a negative impact on their wealth.
On the topside, Wong thinks gold prices could stabilise at US$1,600-US$1,620 per ounce.
Still, Wong says, there are two wild cards that could cause gold prices to spike further: an outbreak of the Korean peninsula war and additional liquidity by the US Federal Reserve.
There has been rising tension in the Korean peninsula in recent weeks, as the North has been issuing daily war threats against the South. It has even threatened the United States, the global powerhouse, of a possible conflict. Geopolitical tensions such as these could lead to investors seeking shelter in gold.
Phillip's Liu reckons there are still some bright spots for upside opportunities for gold over the medium term, despite the current bearish trend for the commodity.
She explains: “There are still risks in the US economy that could present upside for gold prices.”
Liu points out that US financial institutions, for one, are still very open to tail-end risks, as reflected in the failure of four major banks Citigroup Inc, SunTrust Banks Inc, Ally Financial Inc and MetLife Inc in meeting the minimum standards of the nation's stress test, and the weakness in the stress-test planning of two other huge and systematically important banks Goldman Sachs and JP Morgan.
“If any of these big financial institutions defaults or meets with serious liquidity stress, confidence in the economy could get rocked and we could then see another strong, extended rally in gold,” she opines.
Liu remains a long-term bull in gold. She says, over the longer term, increasing inflation is inevitable for the US economy (an effect of the US Federal Reserve's aggressive monetary policy), and this could eventually lead to a boost in investment demand for gold.
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