Gold is stuck in the longest slump in a decade as investors shun bullion for the dollar and bonds, just seven months after Bank of America Corp. said Europe’s debt crisis would send prices to a record $2,000 an ounce.
The bank was joined by Goldman Sachs Group Inc., Morgan Stanley and Barclays Plc in urging investors to buy in December and January. Now, after gold fell 10 percent in a four-month slide through May, they say prices will rebound this year or next as the Federal Reserve shores up the world’s biggest economy by easing monetary policy and devaluing the dollar.
Billionaire George Soros bought more in the first quarter and hedge-fund manager John Paulson held on to the biggest stake in the SPDR Gold Trust, the largest exchange-traded product backed by bullion, Securities and Exchange Commission filings show. Some investors are refusing to capitulate even after failed elections in Greece drove the euro to a two-year low against the dollar and gold slumped as much as 21 percent in December from the record $1,923.70 set in September.
“The $2,000 target has moved further away, but it still holds,” said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto and predicted in November that prices would reach $2,500 in the next several months. “We will see some easing, and that will push gold higher, but the reality is that we are on hold until the outcome of the Greece elections.”
Gold fell 19 percent by May 16 from its closing high of $1,891.90 in August, within 1 percentage point of the common definition of a bear market. Prices then touched a five-month low of $1,523.90 on Dec. 29. After rallying 3.7 percent on June 1, the metal is now up 4.5 percent since the start of January to $1,637.80 today, extending an 11-year bull market.
The Standard & Poor’s GSCI Spot Index (MXWD) of 24 commodities retreated 7.6 percent this year, and the MSCI All-Country World Index of equities declined 0.8 percent. The U.S. Dollar Index, a measure against six currencies, advanced 2.9 percent. Treasuries returned 2.2 percent, a Bank of America index shows.
Hedge funds and other speculators reduced their net-long positions, or bets on higher prices, by 70 percent since August, Commodity Futures Trading Commission data show. They held 77,325 U.S. futures and options in the week ended May 29, almost the fewest since December 2008.
Gold held through ETPs dropped for a third month in May, according to data compiled by Bloomberg. Combined with the decline in prices, the holdings are now valued at $125 billion, down from $141.7 billion in August.
In October, Bank of America forecast $2,000 by early 2012. Goldman predicted in December that gold would reach $1,840 by early June. Barclays and Morgan Stanley said in January that it would average $1,850 and $1,810 this quarter. The metal actually averaged $1,619 since the end of March. Goldman now expects prices to reach $1,940 in 12 months. Barclays predicts an average of $1,790 in the fourth quarter, and Morgan Stanley forecasts $2,000 in the final three months.
Bullion is heading for a 12th straight annual gain, after temporarily giving up its gains for the year last month. The metal rose almost sixfold since the end of 2000, beating the 24 percent advance in the S&P 500, with dividends reinvested, and the 90 percent return on Treasuries. The Dollar Index (DXY) fell 25 percent.
While gold’s four-month drop from February is the longest since the start of the bull market, it’s not the biggest. Futures fell 21 percent in a month in 2006 and 30 percent over eight months in 2008, before rallying to end higher for the year. The 2,375.8 metric tons held in ETPs exceeds official reserves in all but four nations tracked by the International Monetary Fund, and the amount is within 1.5 percent of the record 2,410.2 tons reached in March.
“Gold remains the currency of last resort,” said Jeff Currie, the New York-based head of commodity research at Goldman, which predicts $1,840 by the end of the year. “The case for higher gold prices remains intact.”
Greek voters return to the polls on June 17 after elections on May 6 failed to produce a government. Syriza, a party proposing to cancel the terms of an international bailout and restore pensions and wages, was propelled into second place, increasing prospects that the 17-nation euro would fracture. Those concerns were partially allayed last week after Irish voters backed the EU’s fiscal treaty.
Central banks, the world’s biggest owners of gold, have added to their reserves for 14 consecutive months through March, the longest streak since 1964, IMF data show. Investor demand for gold coins is accelerating, with sales of American Eagles more than doubling to 53,000 ounces last month, according to figures on the U.S. Mint’s website. The 10 most widely held options confer the right to buy bullion at prices from $1,800 to $2,500 between July and March 2013, Comex data show.
Soros Fund Management LLC, founded by the 81-year-old billionaire, more than tripled its investment in the SPDR Gold Trust in the first quarter to 319,550 shares now valued at $50.2 million, an SEC filing May 15 showed. It held as few as 42,800 shares last year and as many as 6.2 million at the end of 2009. Soros called gold the “ultimate asset bubble” in January 2010. Michael Vachon, a spokesman for Soros, didn’t respond to a voicemail for comment.
Paulson & Co., founded by the 56-year-old investor who became a billionaire in 2007 by wagering against the subprime mortgage market, still holds 17.3 million shares in the SPDR Gold Trust, now valued at $2.72 billion, an SEC filing on May 15 showed. Paulson is seeking to reverse record losses last year caused by an ill-timed bet on an economic recovery. Armel Leslie, a spokesman for Paulson, declined to comment.
The decline in prices accelerated a contraction in the size of the gold market. Open interest, or contracts outstanding, fell to 423,433 on June 4, from as much as 650,764 in November 2010, Comex data show. An average of 17.9 million ounces was cleared through London in April, the least since October 2010, according to the London Bullion Market Association.
Prices slumped as investors sought safety in the dollar, the world’s most-used currency, and bonds. The Dollar Index has appreciated for five consecutive weeks, the longest winning streak since January 2009. Yields on 10-year Treasuries, 10-year U.K. gilts and 10-year German bunds declined to records last month, data compiled by Bloomberg show.
“People are moving to the dollar because of liquidity,” said Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.7 billion of assets. “Gold has had extended periods in this bull run where it has backed up and given up some of those gains,” he said, predicting $2,000 in the first quarter of next year.
Gold rallied last year in anticipation of the Federal Reserve announcing a third round of debt buying. The metal rose about 70 percent as the Fed bought $2.3 trillion of debt in two rounds of so-called quantitative easing ending in June 2011. The central bank has since held off on prospects for accelerating growth in this and the next two quarters, the median of as many as 69 economist estimates compiled by Bloomberg show.
Demand may also be supported by record-low interest rates from the U.S. to Europe because gold generally earns investors returns only through price gains. The Fed has pledged to keep rates at “exceptionally low levels” at least through late 2014. The European Central Bank, as well as flooding markets with more than 1 trillion euros ($1.23 trillion), has kept its refinancing rate at 1 percent since December.
Some investors sold gold to cover losses across commodities and equities, said Jeffrey Sica, the Morristown, New Jersey- based president of SICA Wealth Management who helps oversee $1 billion of assets. About $6 trillion was erased from the value of global equities since the end of March, and the S&P GSCI commodities gauge slid 14 percent as Europe’s crisis deepened and growth slowed in China, the biggest consumer of everything from coal to soybeans to copper.
“Gold is still going to $2,000 an ounce this year,” said Michael Widmer, an analyst at Bank of America Merrill Lynch in London, who predicts a fourth-quarter average of $1,875. “It’s just going to take a little bit longer to get there.”