The only three analysts to correctly predict gold’s biggest quarterly slump in four years are now split, reflecting investors’ diverging views on the probability of central banks doing more to shore up growth.
Justin Smirk of Westpac Banking Corp., the most accurate of 20 analysts tracked by Bloomberg in the second quarter, says prices will keep dropping. Eugen Weinberg of Commerzbank AG and Nick Trevethan at ANZ Banking Group Ltd. predict a record within a year. Hedge funds and other speculators are the least bullish since 2008, even with investor holdings of physical bullion in exchange-traded products close to an all-time high, government data and figures compiled by Bloomberg show.
While gold has rallied since tumbling to within 1 percent of a bear market in May, it’s still 16 percent below the record $1,923.70 an ounce reached on Sept. 6. Investors have favored sovereign debt and the dollar to protect their wealth as economic growth slows, driving yields to record lows and the U.S. currency to a two-year high. Central banks from Europe to China cut interest rates this month, and the Federal Reserve said it was prepared to act to boost the recovery.
“There is not much interest in gold right now given the fears of economic slowdown globally,” said Michael Cuggino, who manages $17 billion of assets at Permanent Portfolio Funds in San Francisco, with about 20 percent of his investments in gold. “The velocity of the money has not yet entered the system, but one has to buy gold as it is a long-term play and will keep rising as you need insurance against future inflation.”
Futures fell 4 percent from April to June on the Comex in New York, the most since the third quarter of 2008. The U.S. Dollar Index advanced 3.3 percent and bonds of all types returned an average of 1.6 percent, according to Bank of America Merrill Lynch’s Global Broad Market Index.
Gold is now 3.1 percent higher for the year at $1,614.60. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 1.4 percent, the MSCI All-Country World Index of equities added 5.5 percent, and the Dollar Index, a measure against six trading partners, advanced 3.1 percent. Treasuries returned 2.7 percent, a Bank of America gauge shows. The yield on the benchmark 10- year security fell to a record low of 1.379 percent on July 25, Bloomberg Trader data show.
Bullion has appreciated for 11 consecutive years, with prices surging sevenfold as investors sought a hedge against everything from accelerating inflation to Europe’s debt crisis to slumping equities. The metal rose about 70 percent as the Federal Reserve bought $2.3 trillion of debt in two rounds of so-called quantitative easing from December 2008 through June 2011. Gold’s year-to-date gain is the smallest for the period since 2005, a sign that investor demand may be waning.
“It is not the ultimate safe-haven, and the steep fall last year and the performance this year showed that people preferred the dollar,” said Smirk, a Sydney-based commodity analyst with Westpac. “While quantitative easing may bring in some buying, it’s unlikely to go back to earlier highs.”
Hedge funds cut their net-long position, or bets on higher prices, by 72 percent from a record in August. Their holdings fell to a 43-month low of 71,129 futures and options on July 24, according to the U.S. Commodity Futures Trading Commission. The number of outstanding contracts on the Comex slumped 18 percent in the past year, exchange data show.
While holdings in ETPs rose fourfold in the past five years and now exceed the reserves of all but four of the world’s central banks, they have gained just 1.4 percent to 2,390.6 metric tons this year, data compiled by Bloomberg show.
Demand in India, the biggest buyer, is poised to contract for a second year, the World Gold Council said July 16. The All India Gems & Jewellery Trade Federation predicted in May that purchases will drop 30 percent this year, in part because of a strike by jewelers in March and April. The London-based council cut its 2012 forecast for Chinese demand this month to 870 tons from a May estimate of as much as 1,000 tons. The difference is equal to more than two weeks of global mine production.
Treasuries held in custody by the Federal Reserve for other central banks rose $138.5 billion to a record $2.83 trillion this year, government data show. The increase of 5.1 percent compares with a 2.8 percent expansion in 2011. Germany, the U.K. and France sold debt at the lowest yields ever in July.
Some investors are still betting on a gold rally because central banks will have to do more to bolster growth, increasing the threat of inflation. The International Monetary Fund cut its 2013 global growth forecast to 3.9 percent from 4.1 percent on July 16, saying that Europe’s debt crisis is slowing emerging markets from China to India. It also predicted that year-end consumer prices in advanced economies would increase by 1.65 percent next year, from 1.81 percent in 2012.
“People are waiting for signals for higher inflation,” Mihir Worah, who manages Pacific Investment Management Co.’s $22 billion Commodity Real Return Strategy Fund from Newport Beach, California, said on July 23. “There is a decent possibility that some form of easing will be announced in the next few months, and then prices will start rising.”
Gold will average $1,669 this quarter, up from $1,612 in the previous three months, according to the median of 20 analysts estimates compiled by Bloomberg. Four now expect prices to keep dropping. Smirk predicts $1,490, Alexandra Knight of National Australia Bank Ltd. $1,550, David Wilson of Citigroup Inc. $1,610 and Arne Lohmann Rasmussen of Danske Bank A/S $1,600.
Bullion rose to a five-week high of $1,633.30 on July 27. European Central Bank President Mario Draghi said a day earlier that policy makers will do whatever is needed to save the euro. There is a 90 percent chance of Greece leaving the euro in the next 12 to 18 months, Citigroup Inc. said on July 25.
“The low interest-rate regime, central-bank demand and further stimulus should create a fertile ground for gold bulls,” said ANZ’s Trevethan, a Singapore-based senior commodities strategist. Gold generally earns investors returns only through price gains, making it more attractive as borrowing costs decline.
The ECB cut its benchmark interest rate on July 5 to a record 0.75 percent. Fed officials are scheduled to announce an interest-rate decision at the end of a two-day meeting tomorrow. The central bank has kept borrowing costs at the lowest ever since 2008. China reduced interest rates in June and July.
“We will see strong hands entering the market via more central-bank buying, physically-backed exchange-traded products and purchases of bars” of bullion, said Weinberg, the head of commodity research at Commerzbank in Frankfurt.
Central banks and the IMF are the largest bullion owners with 29,500 tons at the end of last year, or 17 percent of all mined metal, World Gold Council data show. Central banks have been net buyers for two straight years, the council said. Purchases this year will probably exceed the 456 tons added in 2011, the WGC estimates.
“Gold has been trapped in a range for several months,” said Michael Shaoul, the chairman of Marketfield Asset Management in New York, which oversees more than $2 billion of assets. “It has not shown much of a response to the promise of easing by the ECB, but yet you can’t call it weak because it finds some support every time there is a huge sell-off.”
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