Gold Seen Dropping by Citigroup, Morgan Stanley on Fed Taper

Gold will extend losses as the U.S. economy improves, according to Citigroup Inc. and Morgan Stanley, which said the Federal Reserve’s surprise decision to hold stimulus for now will help prices only in the short term.

Bullion may drop below $1,250 an ounce before the end of the year as economic data strengthens and investors expect the Fed to start reducing its asset purchases, Citigroup analysts Ed Morse and Heath Jansen said in a report today. Bullion will average $1,250 next year, down from $1,405 in 2013, they wrote. Morgan Stanley expects bullion to average $1,200 to $1,350 in the coming year before trending lower, it said in a report.

The metal is heading for the first annual drop in 13 years as signs of a U.S. recovery hurt gold demand while stocks and the dollar climb. Gold advanced on Sept. 18 after the Federal Open Market Committee refrained from paring stimulus, counter to economists’ expectations for a reduction. The rally prompted Societe Generale SA to advise selling the metal.

“The postponement of the tapering decision by the FOMC represents only a short-term reprieve for gold,” the Citigroup analysts wrote. “Does this mean the end of the downtrend in gold? In our view, the fundamental and clear answer is no.”

The Fed said on Sept. 18 that policy makers need to see more signs of labor-market gains before reducing its $85 billion of monthly asset purchases. Gold jumped 4.1 percent in London that day, the most in 15 months.

Waning Appetite

“The postponement is only delaying the inevitable,” Morgan Stanley analysts including Peter Richardson said in their report. “The longer-term narrative for gold remains in place -- waning investor appetite for a risk and inflation hedge, challenged physical demand and a rising U.S. dollar.”

Gold for immediate delivery declined 0.3 percent to $1,322.56 by 1:12 p.m. in London. The precious metal tumbled 21 percent this year as the Bloomberg U.S. Dollar Index gained 2.6 percent and global stocks climbed 14 percent.

JPMorgan Chase & Co. advised investors to buy gold on a higher risk of inflation after the Fed’s decision last week, according to a note on Sept. 20. There is strong retail gold demand in Asia, JPMorgan said.

Bullion rose 70 percent from December 2008 to June 2011 as the U.S. central bank pumped more than $2 trillion into the financial system by buying debt, increasing concern that the dollar will be debased. Fed Bank of St. Louis President James Bullard said Sept. 20 that a small taper may occur next month.

ETP Holdings

Citigroup’s annual forecasts for gold were revised higher from $1,358 for 2013 and $1,145 for next year, according to its report. The delay in tapering may prompt a temporary rise in holdings in exchange-traded products, the analysts said.

Gold held in ETPs dropped last week even after U.S. stimulus was maintained, declining 0.4 percent to 1,933.1 metric tons, according to data compiled by Bloomberg. Holdings are at the lowest in more than three years. Fed Chairman Ben S. Bernanke said there is no set timetable for tapering.

“We maintain a fairly pessimistic outlook for gold as a result of the increased probability of a timetable for the ending of QE,” Morgan Stanley’s analysts wrote, referring to quantitative easing. “Our price profile now acknowledges that the annual average peak in the price of gold was achieved in 2012 with minimal prospect for recovery.”

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