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Gold Losing Luster as Price Drop May Curb Demand From China

Gold, which fell the past five months in the worst run since 1997, is losing its luster and lower prices may curb demand from China, according to Danske Bank A/S and Credit Suisse Group AG.

Gold is unlikely to return to its September 2011 record of $1,921.15 an ounce, Credit Suisse said Feb. 1. Goldman Sachs Group Inc. said Feb. 25 bullion’s cycle has probably turned as the U.S. economy recovers. It cut its three-month forecast by 12 percent to $1,615 that day and expects $1,550 in a year. Gold fell 5.3 percent to $1,587.20 in London this year.

Bullion rallied the past 12 years in the best run in at least nine decades as nations from the U.S. to China pledged more action to bolster economies. Hedge funds are now their least bullish since 2007 as growth accelerates and Federal Reserve policy makers review stimulus. Investors have cut about $8.1 billion from gold-exchange-traded products since holdings peaked in December, data compiled by Bloomberg show.

“Gold has lost its luster,” Christin Tuxen, a senior commodities analyst at Danske Bank, said at Bloomberg Link’s FX Debates in London today. “Some of the reasons investors had last year to buy into gold are now gone. The focus will be on interest rates not surging, but gradually moving higher,” which will curb demand for the metal, she said, adding that she estimates the “fair value” of gold now at about $1,250.

ETP Holdings

Holdings in bullion-backed ETPs dropped 106.2 metric tons in February, the most since their creation in 2003, data compiled by Bloomberg show. Investors sold another 33.1 tons since then and now own 2,472.9 tons, 6.1 percent below the record set Dec. 20. Gold is still a “fairly” under-allocated asset, Juan Carlos Artigas, global head of investment research at the World Gold Council, said at the conference today.

Gold generally earns returns only through price gains, and some investors buy it as a hedge against inflation and currency declines. While prices have fallen this year, volumes traded on the Shanghai Gold Exchange increased since last month. India and China are the biggest bullion consumers, and demand from those countries will rise at least 11 percent this year, the London-based gold council said Feb. 14.

“Obviously there’s a lot of investment demand in China,” Ric Deverell, an analyst at Credit Suisse, said at the conference today. “A large part of why people in China bought gold is because prices went up,” and a drop may now curb demand, he said.

Commodities Prices

The Standard & Poor’s GSCI gauge of 24 commodities added 0.1 percent this year. Gold is one of the index’s worst performers, along with wheat and aluminum, while cotton, gasoline and natural gas are among the best.

“My favorite trades in commodities would actually be a couple of shorts,” said Deverell, referring to bets on lower prices. “One of them would be shorting gold.”

Hedge funds are 84 percent less bullish on gold than they were the month before prices reached a record in September 2011. Speculators held a net-long position of 39,631 futures and options in the week ended March 5, the fewest since July 2007, U.S. Commodity Futures Trading Commission data show.

“I think the other one that is going to get absolutely crushed is iron ore,” Deverell said. “You’ve had a very substantial inventory rebuild in terms of Chinese steel, and that’s probably about done. I think it will be a lot lower in six months’ time.”

Ore with 62 percent iron content at the Chinese port of Tianjin dropped 3.1 percent to $139 a dry ton today, extending this year’s slide to 4.1 percent. Swaps to bet on, or hedge, the commodity’s price in December traded at $115.50 a ton, according to GFI Group, a London-based brokerage.

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