Gold, Silver Tumble to Lowest Since September ’10 on Fed Outlook

Gold and silver futures fell to the lowest since September 2010 after the Federal Reserve said stimulus may be reduced later this year as the economy recovers.

Fed Chairman Ben S. Bernanke said yesterday that the central bank, which buys $85 billion of Treasury and mortgage debt each month, may begin reducing purchases this year and end the program in 2014 should the economy continue to improve. The dollar rose to the highest in more than a week against six major currencies and the 10-year yield on Treasuries reached a 22-month high. Commodities dropped.

Bullion has declined 23 percent this year, heading for the biggest annual drop since 1981, as some investors lose faith in it as a store of value, and as speculation grew that the Fed will taper debt-buying that helped the metal cap a 12-year bull run last year. Investors sold 520.7 metric tons valued at $21.6 billion from gold-backed exchange-traded products this year. The price slump hurt billionaire hedge fund manager John Paulson and producer Newcrest Mining Ltd.

“The markets are definitely not prepared to wait until the tapering actually begins,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen. “The combination of Fed tapering, a spike in nominal yields and a stronger dollar has put gold under some considerable pressure.”

Gold Price

Gold futures for August delivery plunged 6.4 percent to settle at $1,286.20 at 1:42 p.m. on the Comex in New York. In electronic trading after the market settled, prices touched $1,275.60, the lowest since Sept. 21, 2010. Trading was double the average in the past 100 days for this time of day, according to data compiled by Bloomberg.

The metal may fall an additional $50 in the next few days and will probably drop to about $1,100 in a year, according to Ric Deverell, head of commodities research at Credit Suisse Group AG. Nouriel Roubini, professor of economics and international business at New York University, has forecast a decline toward $1,000 by 2015.

The Standard & Poor’s GSCI gauge of 24 commodities dropped

4.8 percent since the start of January, the MSCI All-Country World Index of equities rose 3.7 percent and the U.S. Dollar Index added 2.6 percent. A Bank of America Corp. index shows Treasuries lost 1.9 percent.

Money Printing

Gold futures more than doubled from the end of 2008 to the record $1,923.70 in September 2011 as the Fed cut interest rates to a record low. The unprecedented money printing by central banks around the world has failed 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.

Newcrest Mining, Australia’s largest gold producer, said this month it will write down the value of its assets by as much as A$6 billion ($5.5 billion) after the drop in prices. Paulson, the biggest investor in the SPDR Gold Trust, the largest gold ETP, had a 13 percent loss in his Gold Fund last month. That takes the decline since the start of the year to 54 percent, according to a copy of a letter to investors obtained by Bloomberg News.

ETP Holdings

Holdings in the SPDR Gold Trust slumped 351.3 tons this year to 999.6 tons yesterday, the lowest since February 2009. Global holdings now stand at 2,111.2 tons, the least since March 2011, data compiled by Bloomberg show.

While assets dropped every month this year, bullion’s slump in April spurred purchases of coins and jewelry worldwide. India, the largest consumer, raised gold import taxes earlier this month to limit demand and contain a record current-account deficit.

“We are likely to see buying coming through, but I would be surprised to see the same level as we saw in April,” Walter de Wet, an analyst at Standard Bank Plc, said today by phone from Johannesburg.

Gold may drop to $1,250 in a month, down from a previous forecast of $1,425, Joni Teves, an analyst at UBS AG in London, wrote today in a report. The bank cut its three-month outlook to $1,350 from $1,500, and lowered its 2013 estimate to $1,440 from $1,600. Prices will average $1,325 next year and $1,200 in 2015, it said.

Silver Falls

Silver tumbled 34 percent this year, making it the worst-performing commodity. It reached a record $49.8044 an ounce in London in April 2011. Prices could drop to $10 to $15 “in days or weeks,” according to Robin Bhar, an analyst at Societe Generale SA in London.

“There is a long way down,” Bhar said by telephone today. “In an oversupplied market like silver, the price should approach cost of production.”

Silver futures for July delivery slid 8.3 percent to $19.823 an ounce on the Comex. In trading after the settlement, the price touched $19.56, the lowest since Sept. 3, 2010. Trading more than doubled compared with the 100-day average.

On the New York Mercantile Exchange, palladium futures for September delivery slumped 4.5 percent to $665.10 an ounce, the biggest drop since April 15.

Platinum futures for July delivery declined 4.2 percent to $1,363.80 an ounce, the lowest close since Nov. 12, 2009.

(For more on the gold bear market, see EXT5.)
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