SocGen Sees More Gold ETP Sales, Lower Price on ‘Paradigm Shift’

Gold holdings through exchange-traded products will probably drop another 285 metric tons this year as prices fall further on speculation the U.S. economic recovery will mean less stimulus, Societe Generale SA said.

Prices will average $1,200 an ounce in the fourth quarter, compared with $1,386.47 now, the bank said in report today. It previously forecast a drop to $1,375 by the end of the year, before the metal slid into a bear market in April. A “sharp” price-drop could spur a “big increase” in producer hedging, or sales of future production, according to Societe Generale.

Bullion is heading for its first annual drop since 2000 after some investors lost faith in the metal as a store of value and an improving U.S. economy increased speculation the Fed may taper quantitative-easing measures. While the slump spurred purchases of coins and jewelry worldwide, investors reduced ETP holdings so far this year by 515.1 tons that’s now valued at $23 billion, data compiled by Bloomberg show.

“The dramatic gold sell-off in April, combined with the prospect of the Fed starting to taper its QE programme before year-end, has resulted in a paradigm shift in many investors’ attitude towards gold,” analysts including Robin Bhar in London wrote in the report. “Inflation has so far stayed low. We would expect large-scale gold selling from investors who bought gold as a hedge against medium-term inflation.”

ETP Holdings

Global gold ETP holdings stand at 2,116.8 tons after falling the past 18 weeks, the worst run since the first product was listed in 2003. Total sales will reach 800 tons by the end of this year with another 500 tons being sold in 2014, Societe Generale estimates. Prices fell 17 percent in London this year.

The metal’s plunge is hurting producers already contending with rising costs. Newcrest Mining Ltd., Australia’s largest gold producer, said this month it will write down the value of its assets by as much as A$6 billion ($5.9 billion) after the slump. While concern about costs may slow a decline below $1,200, it’s unlikely to provide a “firm support” until prices near $1,000, Societe Generale said.

Mining companies can sell future output at fixed prices to secure loans and can reduce hedges by buying back contracts. They cut the size of the global hedge book over the last 10 years amid gold’s longest bull run in at least nine decades.

Producer Hedging

“It is our impression that gold producers are starting to consider hedging and we would expect to see a substantial step-up in hedging this year compared to last year, which is likely to be the beginning of a new trend,” the bank said. An increase in hedging would push prices lower, it wrote.

Unprecedented money printing by central banks to bolster economic growth helped send U.S. equities to a record in May while failing to spur inflation. Expectations for increases in consumer prices, as measured by the break-even rate for 10-year Treasury Inflation Protected Securities, fell 16 percent this year, reaching a 17-month low last week.

The Fed starts a two-day policy meeting tomorrow. Fed Chairman Ben S. Bernanke said last month the central bank, which is buying $85 billion of Treasuries and mortgage securities a month to spur the economy, could pare quantitative easing if the U.S. economy improves sustainably.

As ETP holdings dropped, there have been signs that lower prices are boosting physical buying elsewhere. The U.K.’s Royal Mint, which saw its gold-coin sales triple in April, said this month the “steep increase” in demand continued in the past several weeks. The U.S. Mint has predicted that its gold and silver coin sales may reach a record in 2013, and the Austrian Mint said it expects “quite good business” in the next couple of months.

“We believe that the dramatic price drop in mid-April was the beginning of the deflation of a bubble,” Societe Generale said. “We expect continued ETF selling to exceed higher demand for jewelery/bars and coins.”

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