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Gold To Continue 2013 Rout; To Fall 20% This Year!
Tradeable, Tradeable Ideas | 15 April 2014
By: Simeon Ang
Articles (125) Profile
  1. A 10 percent rally in gold prices since the beginning of 2014 might be at its end as it resumes its downtrend experienced since 2013.
  2. Recent catalysts to gold prices could fade as the US economy and dollar starts to pick up.
  3. Other hurdles to gold price appreciation include slowing inflation, and the tapering of the Fed’s bond purchase programme.

Gold has always been seen as a safe haven to park cash. During the Eurozone debt crisis, gold soared to great heights on fears that Europe might go bust. There were also concerns about inflation going off the charts due to the influx of cash by the Federal Reserve’s quantitative easing then.

Since then, investors have been selling and in 2013, gold marked its first yearly price drop since 2000. At the end of 2013, gold saw its price tumble some 30 percent.

2014 started out relatively well for gold as its prices seemed to have rebounded about 10 percent. However major investment banks have been sounding out caution since the start of the year.

Recent Catalysts To Blame For Appreciation
Since its meteoric fall from grace, gold has staged somewhat of a comeback in the beginning of 2014. Several catalysts appear to have helped gold recover some lost ground. These include:

  • Macroeconomic data from the US was slightly mixed in the beginning of the year, the Federal Reserve blamed this on harsh winter weather.
  • Capital outflows from emerging markets after several emerging currencies (Indian Rupee, Thai Baht, Malaysian Ringgit, and Indonesia Rupiah, amongst others) faced a sell-off.
  • China seemingly headed for much lower growth rates than anticipated.
  • Geopolitical tension arising from the Ukraine-Crimean crisis.

At the same time, gold also experienced increased demand from the Chinese retail market during the Lunar New Year festival. This could be due to the depressed prices of gold then.

The recent rebound in gold prices could have thus been due to these seemingly transitory catalysts. As the catalysts slowly fade, gold should resume on its downtrend experienced in 2013.

Gold To Fall To Below US$1,200
International banking giants Goldman Sachs and Morgan Stanley recently highlighted their extremely bearish stances on the bullion.

The table below shows both bank’s price targets as well as potential gold price depreciation based on their targets.

Sources: Goldman Sachs & Morgan Stanley

Why So Bearish?
Essentially there are two major reasons to be bearish on gold in the medium term.

  • The economic acceleration of major economies like the US and other developed nations. The US is projected to grow about 2.9 percent by independent forecasters.

Because of this upward growth trajectory, several things might happen or have already begun to take place. Examples of these things include less accommodative monetary policy by the Federal Reserve (read: tapering of QE), and an increase in interest rates.

Source: Bloomberg, Morgan Stanley Research

In light of this, investors are expected to invest in “risk-on” assets such as equities and corporate bonds. In an increasing interest rate environment, investors would generally invest in assets with higher yields such as the US dollar (to appreciate when interest rates rise), and dump safe assets such as gold.

  • Inflation in the US is not picking up even as QE was anticipated to stoke price gains across the board.

Often regarded as a hedge against inflation, gold has been further shunned as the US grapples with low inflation rather than the anticipated high inflation.

In fact, in its latest minutes, the Federal Reserve expressed worry that the inflation rate has been too low, hovering at about 1.1 percent to 1.6 percent since January 2014.

On the global front, the IMF anticipates that inflation in advanced economies will hit about 1.5 percent, a meagre increase compared with 1.4 percent in 2013.

With inflation being so benign, portfolio managers would see less need to hedge against inflation by investing in safe assets such as gold.

Tough Luck, Gold
As mentioned above, despite the rebound experienced in the beginning of the year, gold, as an investment assets, is indeed being frowned upon by many these days.

If investment giant Goldman Sachs can be so bearish about gold, I don’t see why you should not be as well. Because hey, Goldman Sachs rules the world.

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Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

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