Gold Rally Seen Ending by CPM as Investors Reassess U.S. Economy

  • Prices risk dropping to $1,130 by September: research group
  • Christian's outlook mirrors forecasts of bears like Goldman

Add another voice calling for the demise of this year’s gold rally.

Bullion will drop more than 7 percent to $1,130 an ounce by September, Jeffrey Christian, the New York-based managing partner at CPM, said in an interview before the release of the research company’s “Gold Yearbook.” His outlook is in line with a forecast by Goldman Sachs Group Inc. for the metal to reach $1,100 in the near term.

Gold climbed as much as 21 percent this year to a 13-month high of $1,284.64 on March 11 amid concerns global financial turmoil may derail economic growth in the U.S. and prompt policy makers to delay interest-rate increases. Since the beginning of February, the rally has been sputtering and the Standard & Poor’s 500 Index has been rising as economic data signal the U.S. economy may be resilient enough to weather a rate boost implemented sooner than later.

“What you’re seeing now, with the strong rise in S&P over the last couple of weeks, is that investors are in fact reevaluating their economic pessimism and they’re backing away from” gold, Christian said last week in New York. “Over the course of the second and third quarters, what you’d find is that investors would move away from this negative view of the economy and stocks.”

Christian gave his outlook days before Federal Reserve Chair Janet Yellen said it’s appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.

On March 25, government data showed the U.S. economy grew in the fourth quarter of 2015 at a faster pace than the previous estimate. On Monday, data also showed incomes rose, pushing the savings rate to a one-year high, while contract signings for home sales climbed in February by the most in a year.

The improving economic outlook prompted traders to price in increasing odds of a Fed rate increase. The chance of a boost in borrowing costs by December was at 64 percent as of Tuesday, up from 54 percent a month earlier, Fed funds futures data show. CPM’s gold price outlook assumes the Fed would raise rates one to three times this year, Christian said.

More Bears

Societe Generale SA said this month that the gold rally this year is unsustainable, and the bank remains bearish, forecasting prices will average $1,075 an ounce in the fourth quarter. While Morgan Stanley raised its price forecast for gold, its average outlook for the third quarter is $1,150 an ounce, still lower than current prices. In a report March 15, the bank cited “significant improvement in economic activity in the major economies” as key risks for gold bugs.

Gold’s fortunes will reverse again by the fourth quarter, Christian said. Prices will rebound, ending the year at $1,280 to $1,300 an ounce, as investors refocus their attention on the longer-term outlook on the global economy.

“We think investment demand for gold will rise beyond the third quarter of this year,” Christian said. “We do think there are any number of problems in the economy. Investors have already shown their willingness to move into gold over the last three months.”

Mine production will rise about 3.2 percent to 91.8 million ounces in 2016, from a year ago, CPM said in its yearbook. Total fabrication demand, including jewelry, electronics and dental use, will increase about 1.4 percent to 97.5 million ounces, it said. Net private investment will drop about 5.8 percent to 15 million ounces, CPM said.

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