Morgan Stanley: Gold Could Plunge to $800, and It's Not Because of China's Reserves

It's the end of an era

Gold May Slump to $800 on Market Fundamentals, Price Says

Gold's recent dramatic descent began shortly after China revealed its gold reserves for the first time in six years.

Source: Bloomberg

On Sunday evening, gold plunged in thin trading to less than $1,100 an ounce and has been hovering near multiyear lows ever since. While plenty of gold bugs were swift to dismiss the China report as misleading, Morgan Stanley is pointing to longer-term trends that are sending the shiny stuff lower.

Analysts led by Tom Price now say the metal could fall as low as $800 an ounce, as reported by Bloomberg News.

They figure that the era of price stability that once ruled precious metals is now coming to an end. The Morgan Stanley chart below shows a rather stable line for gold, silver, palladium, and company, while other commodities, such as iron ore, have seen more volatility. 


Source: Morgan Stanley

Why the end of the era? Here's what the analysts say:

But price stability in Precious Metals has ended. Indeed, gold and silver prices have been in trend decline since May. Why? The passing of deflation risk, anticipation of the US Federal Reserve's first interest rate hike, another debt resolution for Greece, and the collapse in China's equity markets (prompting loss-covering asset sales) – have all hit these prices over 8-10 weeks. So the PBoC's announcement last week, about China's surprisingly low official gold holdings, was really just the latest in a string of bearish events. It's possible that the next short-term driver in metal markets will be declining oil prices (WTI & Brent down 10-16% in 4 weeks).

While the analysts expect gold will probably end up around $1,050, they do say an interest rate hike in the U.S., another correction in China's stock market, and further selling of reserves by central banks could result in that worst-case scenario of $800 (and some very grumpy gold bugs).

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