Gold Downside Risk Seen ‘Significant’ to Goldman Sachs

Goldman Sachs Group Inc.’s Jeffrey Currie
Jeffrey Currie, global head of commodities research at Goldman Sachs Group Inc. Photographer: Chris Goodney/Bloomberg

Goldman Sachs Group Inc.’s Jeffrey Currie says the worst isn’t over yet for gold after prices erased almost all of this year’s gain.

“Risks are significantly skewed to the downside,” said Currie, who told investors to sell last year before gold’s biggest collapse since 1980. “Much of the support was coming from political uncertainty in Ukraine and what was going on in Middle East,” and those concerns have faded, he said in a telephone interview yesterday.

After bullion’s rally in the first half of the year beat gains for commodities, equities and Treasuries, the metal is heading for its first quarterly decline in 2014. Demand for precious metals as a protection of wealth has been eroded by the outlook for a strengthening U.S. economy, which helped spark a rally in the dollar as the Standard & Poor’s 500 Index of equities surged to a record this month.

Gold fell to an eight-month low this week after the Federal Reserve on Sept. 17 raised its outlook for interest rates, crimping demand for an inflation hedge. Money managers cut bullish holdings for five weeks, while holdings through global exchange-traded funds slumped to the lowest since 2009.

“Gold is more responsive to the near-term growth momentum in the U.S., rather than long-term inflation concerns,” Damien Courvalin, a Goldman analyst, said yesterday in an interview at Bloomberg headquarters in New York. “Interest is lower in gold than it was say 18 months ago.”

Dollar Rally

Futures fell 0.5 percent to $1,212.90 an ounce at 8:37 a.m. on the Comex in New York. That reduced the year’s gain to 0.9 percent, down from as much as 16 percent. The Bloomberg Commodity Index of 22 raw materials slid 5.2 percent in 2014, while the MSCI All-Country World Index of equities rose 3.7 percent. The Bloomberg Dollar Spot Index climbed 4.3 percent.

Currie isn’t alone in predicting the end to this year’s rebound that drove the best first-half performance for gold since 2010. Societe Generale SA’s Michael Haigh, who also correctly forecast 2013’s slump, said in a report this month that he expects the metal will drop more than 5 percent by 2015’s third quarter. Investors, who in June and July were adding to bullish wagers, may be starting to agree with analysts, taking their short holdings on the metal to the highest in three months.

Muted Inflation

After 12 straight years of gains, gold tumbled 28 percent in 2013 as an equity rally and muted inflation prompted some investors to lose their faith in the metal.

Currie on April 10, 2013, issued a sell recommendation, before a two-day 13 percent plunge that ended April 15, 2013, and left prices in a bear market. The slump wasn’t foreseen by most money mangers, who had increased their bullish bets by 11 percent the prior month. The investors cut holdings to a six-year low by December.

Now, Currie expects bullion to drop to $1,050 by the end of 2014, maintaining a forecast from the start of the year. SocGen’s Haigh sees prices at $1,150 in the third quarter next year, he said in a report e-mailed Sept. 12. The metal reached this year’s peak of $1,392.60 in March amid violence in Ukraine.

Citigroup Inc. yesterday lowered its forecast for next year amid expectations of U.S. rate increases, while the “risk-related source of support has been diminished.” The bank cut its outlook to $1,225 from $1,365. UBS AG reduced it three-month outlook yesterday by 7.7 percent to $1,200.

Target Price

“Turbulence is still there, but is not escalating any further, which we believe will help gold decline to our target,” Courvalin said.

Gold prices are down 8.6 percent since June 30. The Fed on Sept. 17 reduced monthly bond purchases to $15 billion, keeping it on track to announce an end to the program in October. Policy makers also raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent from 1.125 percent in June.

“Our inflation forecasts are pretty subdued,” Currie said.

Inflation expectations, measured by the five-year Treasury break-even rate, this week reached the lowest since June 2013.

Ten-year notes yielded 0.86 percent yesterday after accounting for inflation. That compares with minus 2.1 percent in October 2011, the lowest since 1980. Some investors use the measure to gauge the so-called real interest rate, which removes the impact of inflation on the Fed’s borrowing costs that are near zero percent.

“Ultimately, what drives fair value for gold prices is the U.S. real interest-rate environment,” Courvalin said.

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