Gold Traders Split as Rout Resumes in Bear Market: Commodities

Gold traders are divided on the outlook for prices, with some judging that the slump to a 34-month low following the Federal Reserve’s comments on tapering stimulus will spur demand for coins and jewelry.

Fifteen analysts surveyed by Bloomberg expect prices to rise next week and 14 were bearish. Three were neutral. Gold fell 14 percent in the past two weeks, reaching $1,180.50 an ounce today, the lowest since August 2010. The metal is poised for the biggest quarterly drop in at least nine decades after investors cut bullion holdings to a three-year low.

Gold is heading for its worst year since 1981 after some investors lost faith in it as a store of value and amid mounting speculation the Fed will curb debt-buying. Fed Chairman Ben S. Bernanke said last week he may slow asset purchases this year if the economy continues to improve. The plunge into a bear market in mid-April was followed by a rally of as much as 13 percent over three weeks as coin and jewelry sales surged.

“We are already at distressed prices and they may even go lower,” said Thorsten Polleit, chief economist at Degussa Goldhandel GmbH, a precious metal trading and investment company in Frankfurt. “The market is really oversold. There are a lot of strategic buyers showing up who are taking advantage of current prices.”

Gold Price

The metal fell 29 percent this year to $1,196 in London, and is set for a 25 percent drop this quarter, the most since at least 1920, according to data compiled by Bloomberg. The Standard & Poor’s GSCI gauge of 24 commodities dropped 4.5 percent since the start of January and the MSCI All-Country World Index of equities rose 4.8 percent. Treasuries lost 2.6 percent, a Bank of America Corp. index shows.

Gold as much as doubled from 2008 to a record $1,921.15 in September 2011 as the U.S. central bank led nations in cutting interest rates and buying debt. Bernanke said the Fed may reduce its $85 billion of monthly purchases this year and end the program in 2014. In contrast, Fed Bank of Richmond President Jeffrey Lacker said in a June 26 Bloomberg Television interview that it isn’t close to reducing its balance sheet and he expects “a couple more years of sluggish growth.”

While physical demand isn’t as strong as in April, buyers in Asia are taking advantage of lower prices “in bits and pieces,” Joni Teves, an analyst at UBS AG in London, wrote yesterday in a report. Weaker demand in India, the biggest buyer, because of government restrictions on imports contrasts with “decent” consumption in China, she said.

Technical Strategies

Gold’s 14-day relative-strength index was at 19.3 today, the lowest since April 15 and below the level of 30 that indicates to some analysts who study technical charts that a rebound may be imminent. Prices jumped from as low as $1,321.95 on April 16 to as high as $1,488.10 on May 3.

Trading gold using the 14-day RSI measure would have given investors the second-biggest loss this year, after a buy-and-hold strategy, among 23 technical analysis tools, data compiled by Bloomberg show. The returns don’t account for trading costs.

Exchange-traded-product investors sold 583.2 metric tons this year, erasing $63 billion from the value of holdings, data compiled by Bloomberg show. The 2,048.7 tons now held is the least since May 2010. Hedge funds and other large speculators cut bets on higher prices by 80 percent since October, U.S. Commodity Futures Trading Commission data show.

Price Forecast

Analysts at banks from Morgan Stanley to Credit Suisse Group AG to Goldman Sachs Group Inc. trimmed gold forecasts this week, with Morgan Stanley saying that waning investor interest has turned more serious amid a clearer outlook for when the Fed may withdraw stimulus. Prices will average $1,150 in next year’s third quarter, Credit Suisse said in a June 25 report.

“It’s a crowd exit and everybody is in deep fear of how low it can go,” said Jonathan Bouchet, a director at Delman SA in Geneva, which manages assets including precious metals. “Gold will never go to $500, but it can drop another leg.”

Bullion is heading for a third consecutive quarterly drop, the worst run since 2001, partly because the unprecedented money printing by central banks around the world that pushed U.S. equities to a record last month has so far 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 19 percent this year.

Coin Sales

There are no signs of increasing demand for coins right now. The U.S. Mint sold 47,000 ounces of American Eagles so far this month, compared with 70,000 ounces in May and 209,500 ounces in April, data on its website show. Price swings may be deterring buyers, with the metal’s 60-day historical volatility at 32.5 percent yesterday, the highest since October 2011, according to data compiled by Bloomberg.

In other commodities, four of 12 people surveyed expect raw sugar to fall next week and five were neutral. The commodity slid 13 percent to 16.97 cents a pound on ICE Futures U.S. in New York this year.

Thirteen of 25 surveyed anticipate lower corn prices and eight said the grain will gain, while 15 of 26 said soybeans will fall and six expect higher prices. Twelve traders predicted declines in wheat and four were bullish. Corn dropped 24 percent to $5.33 a bushel this year in Chicago. The December contract, which reflects supply after the U.S. harvest, is down 11 percent this year. Soybeans fell 9.7 percent to $12.725 a bushel, as wheat slipped 13 percent to $6.7475 a bushel.

Copper Survey

Ten traders and analysts surveyed expect copper to fall next week, eight were bullish and four were neutral. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, fell 15 percent to $6,774 a ton this year.

As gold retreated this week after the dollar strengthened and the 10-year yield on Treasuries reached a 22-month high, the S&P GSCI gauge of raw materials fell to a two-month low on June 24 amid concern that a cash squeeze in China will erode demand. Silver and gold are leading declines in commodities this year.

“An increasing dollar, rising bond yields, falling equity markets and concerns about China’s banking system was a poison cocktail not only for gold, but other commodities as well,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. “For base metals I would say the price fall is exaggerated. We are confident the economy will improve in the second half of the year, so this should lead to higher prices.”

Gold survey results: Bullish: 15 Bearish: 14 Hold: 3
Copper survey results: Bullish: 8 Bearish: 10 Hold: 4
Corn survey results: Bullish: 8 Bearish: 13 Hold: 4
Soybean survey results: Bullish: 6 Bearish: 15 Hold: 5
Wheat survey results: Bullish: 4 Bearish: 12 Hold: 8
Raw sugar survey results: Bullish: 3 Bearish: 4 Hold: 5
White sugar survey results: Bullish: 4 Bearish: 3 Hold: 5
White sugar premium results: Widen: 1 Narrow: 4 Neutral: 7
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