Gold's Monkey Magic Seen Fading After Biggest Advance Since 1980

Gold's Monkey Magic Seen Fading
  • Top consumer China buys less during lunar new year holidays
  • Lack of jewelry demand will send price to $950, SocGen says

The world’s best-performing commodity this year may be about to lose its monkey magic.

Gold, after posting its biggest rally to start a year since 1980, will drop this month as Chinese consumers slow purchases that surged before the start of the Lunar New Year, according to eight of 12 analysts surveyed by Bloomberg. Prices that touched a seven-month high of $1,200.97 an ounce on Monday may drop to $1,100, based on average estimates from seven analysts providing forecasts.

After three straight annual declines, gold surged in 2016 as investors sought a haven from slumping equities and weaker economies, while Chinese consumers purchased gifts before the Year of the Monkey began on Monday. But seasonal buying in China, which accounts for more than a quarter of global demand for gold jewelry, usually drops off as shops close for at least a week of holidays, removing a source of price support. Over the past decade, gold’s biggest monthly gain on average was in January, with small advances in February and losses in March.

“The gold market needs physical buying, and we’re already seeing a slowdown of trade with China,” said Robin Bhar, a London-based analyst at Societe Generale SA who predicts prices may drop to $950 this year. “In the week after New Year, China will come to a virtual standstill, and this will almost certainly have some impact on the gold price. I can’t see a catalyst to keep driving prices higher.”

Goldman Sachs Group Inc. on Tuesday reiterated its December forecast that prices will drop for a fourth straight year, dipping to $1,000 by the end of 2016. The bank expects the Federal Reserve to increases U.S. interest rates no fewer than three times, eroding the appeal of the metal because it doesn’t pay dividends like bonds or stocks.

Gold for immediate delivery lost 0.4 percent to $1,184.24 on Wednesday and is up 12 percent this year, more than any other raw material tracked by the Bloomberg Commodity Index and the metal’s best start since a 24 percent gain in 1980 over the same period. While demand for a haven could keep prices elevated, history shows that the time of year for the biggest rallies is now past.

January Rallies

Before advancing 5.4 percent in January, the average increase for that month during the previous decade was 4.4 percent, about twice the next-largest gains seen in August and November. Since touching a record of $1,921.17 in 2011, gold rose in four of the past five Januarys, as demand increased from China, while prices dropped in three of the past four years in February and March.

“Upwards moves in gold usually run out of steam around the time of the Chinese New Year,” Georgette Boele, a strategist at ABN Amro Bank NV in Amsterdam, said by e-mail on Monday. The metal may drop to $1,130 this month, she said. “A stronger dollar, higher U.S. rates and an improvement in investor sentiment will remain negative drivers for the metals.”

So far, though, the rally has shown little sign of fading. Hedge funds that were betting on price declines in early January have increased their bullish holdings in New York gold futures for four straight weeks to the highest since early November, U.S. Commodity Futures Trading Commission data show. Holdings in exchange-traded funds backed by gold -- which on Jan. 6 were the lowest in more than six years -- have gained every day for three weeks, according to data compiled by Bloomberg. In January, they expanded 3.8 percent, the most of any month in a year.

Outlook Changing

While Goldman is forecasting higher U.S. interest rates, investors have scaled back expectations for increases this year as global equity markets sank, oil extended losses and China’s economy slowed. There’s now no chance of an increase next month, down from the 51 percent odds seen at the start of the year, according to data tracked by Bloomberg.

“We’ve had four years of losses in gold, but it seems the bottom has come in just at the moment when central bankers have again run into a wall,” said Adrian Ash, head of research at BullionVault, an online trading service in London. “It’s clear that the Fed won’t be able to raise rates this year, and investors are taking another hard look at gold. This rally could get very interesting.”

Slumping equity markets are forcing some investors to seek alternative assets like gold. The MSCI All-World Country Index, a measure of global stocks, has tumbled 11 percent in 2016, the worst start to a year since the financial crisis in 2008.

“Sentiment towards gold seems to be turning, particularly given the stock market volatility,” Adrian Day, president of Adrian Day Asset Management in Annapolis, Maryland, which oversees $145 million, said by e-mail on Jan. 29.

For Adam Finn, the head of precious metals at Triland Metals in London, this year’s rally is more of a blip than a change in the long-term, bearish trend for gold. While prices rose above their 200-day moving average on Feb. 3, such moves have been more reliable as a sell signal than a buy signal, he said. The previous three times that occurred, gold fell 4.6 percent the following month.

“The rally may well be running out of momentum,” Finn said Monday. “We’ve seen these January rallies before, and they often proved short-lived.”

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