Gold Sinking to $800 in Worst-Case Outlook at Morgan Stanley

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Gold’s been mauled this week as commodities sank to a 13-year low. It may get a lot worse, according to Morgan Stanley, which said that under its worst-case scenario bullion may tumble to $800 an ounce.

To get there would require U.S. policy makers to start raising interest rates, another correction in China’s stock markets and a selldown of reserves by central banks, analyst Tom Price said in a report. The metal is more likely to trade at about $1,050 an ounce, according to the bank, which left its 2015 forecast unchanged. The price closed at $1,094.10 an ounce on Thursday.

Gold has fallen out of favor with investors as the Federal Reserve prepares to increase borrowing costs, boosting the value of the dollar. Prices could drop below $1,000 an ounce, according to Goldman Sachs Group Inc.’s Jeffrey Currie, while Standard Chartered Plc said it will probably extend losses. The rout in bullion helped to drag the Bloomberg Commodity Index to the lowest level since 2002 as crude oil and base metals fell.

“The backdrop for this commodity complex is deteriorating,” Morgan Stanley said in the July 22 report, referring to precious metals. The bank’s unchanged forecasts have greater downside risk after July’s selloff and persistent weakness in China’s equity markets, it said.

Gold for immediate delivery sank to $1,086.18 an ounce on Monday, the lowest level since March 2010, according to Bloomberg generic pricing, and it last traded below $800 in

2008. Morgan Stanley’s 2015 forecast is $1,190.

‘Bottom Line’

“Sentiments are so weak right now,” said Helen Lau, an analyst at Argonaut Securities (Asia) Ltd. in Hong Kong, who forecast prices may extend losses as the Fed tightens. “The bottom line is they’ll increase rates this year.”

Investors are cutting positions in bullion-backed exchange-traded funds as prices drop and banks issue bearish forecasts. The holdings shrank 4.8 metric tons to 1,560.7 tons on Wednesday, dropping for a fifth day, data compiled by Bloomberg showed. They’ve contracted in nine of the past 10 quarters.

Fed Chair Janet Yellen reiterated last week the central bank will boost borrowing costs this year, and economists projected a 50 percent chance of liftoff in September, according to the median probability of 46 economists in a Bloomberg survey. Higher rates can draw investors away from gold.

China’s announcement last week that it had added less gold to reserves in recent years than had been expected hurt prices, Morgan Stanley said. The update from China followed other events that were bearish for bullion, including lower risks from the Greek debt crisis and prospects for higher rates, it said.

For more, read this QuickTake: The Rise and Fall of Gold

“It’s possible that the next short-term driver in metal markets will be declining oil prices,” Morgan Stanley said.

(Updates to add comment from Argonaut in sixth paragraph.)
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