Credit Agricole Says Easy Money Shorting Gold Over on China

Photographer: Gianluca Colla/Bloomberg

The word "Switzerland" sits stamped on the side of a newly manufactured 400 ounce gold bar at a precious metal refinery near Mendrisio, Switzerland. Switzerland sent more than 80 percent of its gold and silver bullion and coin exports to Asia last month, the Swiss Federal Customs Administration said on Feb. 20 in the first breakdown of the gold-trade data since 1980. Close

The word "Switzerland" sits stamped on the side of a newly manufactured 400 ounce gold... Read More

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Photographer: Gianluca Colla/Bloomberg

The word "Switzerland" sits stamped on the side of a newly manufactured 400 ounce gold bar at a precious metal refinery near Mendrisio, Switzerland. Switzerland sent more than 80 percent of its gold and silver bullion and coin exports to Asia last month, the Swiss Federal Customs Administration said on Feb. 20 in the first breakdown of the gold-trade data since 1980.

Gold demand in China will be sustained as incomes expand in the largest consuming nation, supporting prices above $1,000 and extending bullion’s flow from west to east, said Credit Agricole SA’s private-banking unit.

“The market hasn’t quite fathomed the scale of annual Chinese buying just because of the wealth effect in China over the next coming years,” said Davis Hall, global head of foreign exchange and precious metals advisory. “I don’t think gold’s going to come back to $1,000, like many people are suggesting, because I’m seeing what’s happening in China.”

Bullion advanced 11 percent this year on rising consumption in Asia and as emerging-market turmoil and signs the U.S. recovery may be faltering boosted haven demand. China overtook India as the largest user last year as the biggest price drop in more than three decades spurred purchases, the World Gold Council said last week. Holdings in exchange-traded products stabilized this month after a record contraction last year.

“The easy money from being net short is probably behind us,” Hall said in an interview in Singapore on Feb. 24, referring to bets on lower prices. “I’m not bullish at current levels. Gold is an opportunistic trade. I’d much prefer to buy if it comes down to $1,250.”

Photographer: Lam Yik Fei/Bloomberg

An employee arranges gold bangles on a display stand at a Chow Sang Sang Holdings International Ltd. jewelry store in the Mongkok district of Hong Kong. China overtook India as the largest user last year as the biggest price drop in more than three decades spurred purchases, the World Gold Council said last week. Close

An employee arranges gold bangles on a display stand at a Chow Sang Sang Holdings... Read More

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Photographer: Lam Yik Fei/Bloomberg

An employee arranges gold bangles on a display stand at a Chow Sang Sang Holdings International Ltd. jewelry store in the Mongkok district of Hong Kong. China overtook India as the largest user last year as the biggest price drop in more than three decades spurred purchases, the World Gold Council said last week.

Gold, which is headed for the first back-to-back monthly increase since the two-month advance through August, traded at $1,343.96 an ounce at 7:07 a.m. in London after rising to $1,345.46, the highest price since Oct. 30. Bullion slumped 28 percent in 2013 to end a 12-year rally as the U.S. Federal Reserve prepared to trim monthly bond-buying that boosted asset prices while failing to stoke inflation.

Goldman’s Outlook

Hall’s view counters expectations from Goldman Sachs Group Inc. to Westpac Banking Corp. that bullion will probably extend declines in 2014. Gold will end the year at $1,050 an ounce, Goldman said in a Feb. 12 report, restating a forecast. Last year, Jeffrey Currie, head of commodities research, said there was a risk gold may decline to less than $1,000 in 2014.

Westpac’s Justin Smirk, the second most-accurate forecaster tracked by Bloomberg over the past two years, forecast bullion at $1,011 in December, a Feb. 20 report showed. Prices will drop as the U.S. recovers and the dollar strengthens, Smirk wrote.

At the Fed’s January meeting, where asset purchases were reduced for a second time, policy makers signaled that they won’t let weaker economic reports interrupt plans to taper stimulus, according to minutes released Feb. 19. A few officials said it might be appropriate to raise the federal funds rate “relatively soon,” the minutes showed. The main lending rate has been held at zero to 0.25 percent since December 2008.

Bond Yields

The cuts to stimulus and expectation for bond yields to rise will probably keep gold below $1,400 an ounce, said Hall, who has studied precious-metals markets for 12 years.

Consumption in China rose 32 percent to a record 1,065.8 metric tons last year, according to the producer-funded council. Prices would have declined to as low as $850 or $900 last year had consumers in China not bought the metal, said Hall.

China’s economy, the largest after the U.S., expanded to $8.23 trillion in 2012 from $1.45 trillion in 2002, according to data compiled by Bloomberg. The expansion lifted incomes in the world’s most-populous nation.

The flow of bullion from west to east was highlighted by the World Gold Council in November, citing increased activity at refiners in Switzerland that were recasting bullion into the higher-purity, smaller-sized bars preferred by Asian buyers. Switzerland sent more than 80 percent of its gold and silver bullion and coin exports to Asia last month, the Swiss Federal Customs Administration said on Feb. 20 in the first breakdown of the gold-trade data since 1980.

Strong Demand

Underlying physical bullion demand remains strong, Coutts & Co., the private-banking division of Royal Bank of Scotland Group Plc, said in a note yesterday. The unit sees $1,250 an ounce as opportunity for purchases, Gary Dugan, chief investment officer for Asia and the Middle East, wrote in the note.

As China’s economy slowed amid government efforts to curb excessive credit and rein in the property sector, the benchmark Shanghai Composite Index tumbled 6.8 percent last year. That trailed the 30 percent surge in the Standard & Poor’s 500 Index and a 3.3 percent advance in the Bloomberg Dollar Spot Index.

“Nothing clears the mind more than the absence of alternatives,” said Hall at Credit Agricole. “The west doesn’t want gold but the east is just starting to gain this appetite and I don’t think it’s going to change.”

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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