The Brazilians Dominating Gold Forecasting See More PainDebarati Roy
Forget Mario Draghi and the Chinese aunties. The only thing that matters for gold is the Federal Reserve and that spells trouble for prices, according to the most-accurate bullion forecaster over the past two years.
With the Fed indicating it will raise U.S. interest rates for the first time since 2006 as the world’s biggest economy recovers, bullion will post its third straight annual drop, said Artur Passos, who produces the metals outlook at Itau Unibanco Holding SA, Latin America’s biggest bank by market value. Passos, part of a research group led by former central banker Ilan Goldfajn, was the most-accurate among 20 forecasters, data compiled by Bloomberg Rankings show.
An improving U.S. economy erodes the appeal of gold as a haven and sends investors to assets with better yield prospects such as bonds and equities. After rallying as much as 10 percent in January, prices tumbled, turning negative for the year when a report last week showed employers added more jobs than forecast in February, the latest signal that economic expansion is gaining momentum.
“The overall environment for gold is bearish,” said Passos, an economist, who expects prices to slump a further 4.5 percent this year to $1,100 an ounce, the lowest since 2010. “The rate hike is imminent, and that is the most important thing that the gold market watches,” he said by telephone from Sao Paulo.
Futures are down 2.7 percent this year to $1,151.90 on the Comex in New York, while the Bloomberg Commodity Index of 22 raw materials dropped 5.1 percent. The Bloomberg Dollar Spot Index has surged 7.3 percent, heading for the biggest quarterly gain since 2008. The Standard & Poor’s 500 Index of equities rose 0.3 percent, touching a record high on Feb. 25.
The year got off to a bullish start for gold, with a January rally of 8 percent that was the biggest for any month since 2012. Gold was energized by renewed inflation concerns after European Central Bank President Draghi pledged monetary stimulus measures to spur an anemic recovery for the euro area after two years of recession.
Adding to bullion’s appeal were signs that consumers in China and India, the world’s top buyers, were taking advantage of the 29 percent slump in prices over the previous two years to stock up. Middle-aged Chinese women -- known in the local vernacular as aunties -- often buy coins and jewelry to celebrate the Lunar New Year holidays that take place in January or February.
The allure for investors didn’t last as speculation of Fed action began to overwhelm developments in Asia and Europe. On March 5, when Draghi announced his plan for asset purchases amounting to 60 billion euros ($63.8 billion) a month, gold futures fell, partly because traders were more concerned about the U.S. jobs report scheduled for the next day.
On March 6, the government said employers added 295,000 workers and the unemployment rate reached the lowest in almost seven years. Gold tumbled to the lowest since Dec. 1.
Itau’s Passos, who has been analyzing commodities for a decade, has plenty of company in predicting further declines.
Goldman Sachs Group Inc. reiterated in a Jan. 25 report that a “higher rate environment” will drive prices lower, saying that the metal will reach $1,000 by the end of 2016. Michael Lewis of Deutsche Bank AG and Edel Tully of UBS Group AG, the second- and third most-accurate forecasters in the Bloomberg ranking, predict prices this year on average will be lower than in 2014.
“Unless something changes drastically, it seems that the rate hike is coming this year, and the dollar is in a secular rally, making it bearish for gold,” said Atul Lele, who helps oversee $5.4 billion as the chief investment officer at Nassau, Bahamas-based Deltec International Group. “There are no pressing reasons for a safe-haven trade, and it is more beneficiary to be in equities.”
While the trend is mainly down, there may be “temporary support” during times of financial turmoil, Passos said.
Gold rose earlier this year partly as Greece battled creditors in a dispute that threatened its membership in the European Union. The metal touched a five-month high of $1,307.80 on Jan. 22, after the Swiss central bank’s surprise move to abandon the franc’s cap against the euro.
“The chaos in Europe is probably not over, and we could see re-emergence of haven buying,” said Jeff Sica, the president and chief executive officer of Circle Squared Alternative Investments, which oversees $1.5 billion.
There are signs some investors are betting the slump is ending. Short interest, a measure of bearish sentiment, slid on March 4 to the lowest since April for the SPDR Gold Shares exchange-traded fund, according to data compiled by Bloomberg and Markit Ltd.
Part of the problem right now for gold, a traditional hedge against inflation, is that investors are confident the Fed will start lifting benchmark rates from near zero fast enough to prevent consumer prices from surging as the economy rebounds. The bank’s first move may come as soon as June.
Bond investors’ inflation expectations, based on the 10-year U.S. Treasury break-even rate, have been fading, touching a four-year low in mid-January. The rate has dropped to 1.73 percent from 2.27 percent at the end of July.
Hedge funds have cut their bullish position in gold futures and options for five straights weeks, U.S. government data as of March 3 show. Assets in exchange-traded products backed by bullion fell 0.9 percent last week, the most since November.
“The labor market is doing well, and it’s clear that we will hear about the rate hike either in June or September,” Itau’s Passos said. “It does not matter what other central banks are doing since the Fed rules the gold market.”