Gold ‘Bubble’ Seen Turning to Bear Market by SocGen on RecoveryNicholas Larkin
Gold is in a “bubble” after the best annual run in at least nine decades and will head into a so-called bear market as a stronger U.S. economy helps increase interest rates and cut bullion demand, Societe Generale SA said.
Investors are unlikely to raise gold holdings because inflation has remained low, signs that the economy is improving may spur the Federal Reserve to curb stimulus and the dollar has strengthened, the bank said today in a report. Bullion is down 4.6 percent this year after 12 straight annual gains and would need to drop another 4.8 percent to mark the common definition of a bear market.
Prices fell this year as Fed policy makers debated the pace of asset purchases. Billionaire investor George Soros, who called bullion the “ultimate asset bubble” in 2010, cut his stake in the biggest gold exchange-traded product by 55 percent in the fourth quarter. Goldman Sachs Group Inc. said in February that bullion’s cycle has probably turned as the U.S. economy recovers and Credit Suisse Group AG has said the metal is unlikely to return to the 2011 record of $1,921.15 an ounce.
“The gold price is, in our view, in bubble territory,” Societe Generale analysts including London-based Robin Bhar wrote in the report. “Rising interest rates, driven in part by a positive view of the U.S. economy with an associated improvement in the dollar, could be the perfect storm to start a longer-term bear market.”
Gold for immediate delivery traded at $1,597.48 by 11:14 a.m. in London. While gold’s 1.2 percent advance in March was the first monthly gain since September, it posted the first back-to-back quarterly losses since the start of 2001. A close at $1,520.18 would be a 20 percent drop from Sept. 5, 2011, signaling prices entered a bear market.
Prices will slide to $1,375 by December and average $1,500 this year and $1,400 in 2014, Societe Generale estimates. The metal as much as doubled after central banks, led by the Fed, increased stimulus since 2008 to bolster economic growth.
“Investors have pushed the gold price sharply higher over the past 10 years with the past five-year rally driven by fears that aggressive central bank quantitative easing would lead to very high inflation,” Societe Generale said. “Professional sentiment, as evidenced by heavy redemptions in ETFs and the increasing willingness of managed money investors to trade from the short side, confirms our view that gold may have had its ‘last hurrah.’”
Soros Fund Management LLC, founded by the 82-year-old, owned about $97 million of metal through the SPDR Gold Trust as of Dec. 31, a regulatory filing showed in February. Investors hold about 2,450 metric tons through ETPs, about 6.9 percent below the record set Dec. 20, data compiled by Bloomberg show.
Money managers cut bets on higher prices by 70 percent since October, U.S. Commodity Futures Trading Commission data show. Speculators held a net-long position of 60,126 futures and options as of March 26. They held 39,631 contracts in the week to March 5, the least since July 2007, the data show.
Gold, which generally earns returns only through price gains, averaged a record $1,669 last year as nations pledged more stimulus. The Fed is currently purchasing $85 billion of Treasury and mortgage debt a month.
U.S. growth will slow to 1.75 percent this quarter, compared with 2.05 percent in the first quarter, according to the median estimate of as many as 74 economists compiled by Bloomberg. Expansion will then accelerate each quarter through mid-2014. The U.S. Dollar Index, a measure against six currencies, climbed to an almost eight-month high on March 27 and is up 3.6 percent this year.
Mining companies have so far held off locking in prices by selling future production, and companies are still reluctant to hedge, Societe Generale said. Barclays Plc expects net hedging of 20 tons this year and 35 tons in 2014. Annual production is about 2,700 tons.
“A sustained fall below $1,400 an ounce could unleash fresh waves of producer hedging not associated with project-related hedging by miners looking to finance development projects,” Societe Generale said. “A downward price spiral could see gold locked into a vicious downward cycle as increased producer hedging prompts ever lower gold prices and, in turn, more producer hedging.”