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More Banks Pull Away From Bullish Consensus on Gold

Tuesday, 05 March 2013 10:32 AM

More and more major banks are breaking away from the consensus for continued gains in gold prices as an incipient return to growth of the global economy has undermined the argument for holding the precious metal.

After 12 years of sustained gains, which reached a record high just shy of $2,000 per ounce in 2011, gold has fallen out of favor for some investors — shedding some 18 percent from the peak and now closing in on long-term chart support at $1,525.

While most forecasters polled by Reuters in January said gold would continue to rise in 2013 and 2014, albeit at a slower pace than in previous years, Goldman Sachs last week predicted a lower average price for the metal this year.

"Most of (gold's recent) price decline has coincided with a gradual increase in U.S. real rates, reflecting the combination of better-than-expected U.S. economic data, a more hawkish interpretation of recent U.S. Federal Reserve communication, a lower level of U.S. policy uncertainty and easing of concerns for the European sovereign debt crisis," Goldman said.

"Net, these moves in gold and real rates have broadly anticipated the turn in the gold cycle that we had expected for the second half of 2013."

Speculation that the Federal Reserve may scale back quantitative easing measures sooner than expected have unsettled bullion investors. Successive rounds of QE had kept downward pressure on interest rates, a major factor in the bull run.

BNP Paribas, along with Credit Suisse, Citigroup and Societe Generale, is calling for a year-on-year drop in the average gold price in 2014. That would mark the first annual decline in average gold prices since the start of its bull run in 2001.

BNP Paribas revised its 2014 gold forecast to $1,595 from $1,775 last Thursday, three days after Goldman Sachs cut its 2014 gold price view to $1,450 an ounce from $1,750.

Even Bank of America Merrill Lynch, which remains broadly positive on gold, cut its forecasts this week. While still expecting prices to rise strongly next year to an average of $1,838 an ounce, it sees prices turning lower in 2015.

"The importance of investors, coupled with the lack of investor buying, has led to concerns that non-commercial market participants in general have reassessed the rationale of holding gold in a portfolio," the bank said, reducing its 2013 and 2014 forecasts and cutting its 2015 price view to $1,675 from $1,900.

Gold prices have fallen 5 percent in the year to date and have so far averaged $1,647 an ounce, below the $1,698 an ounce posted in the first two months of 2012 and last year's overall average of $1,668 an ounce.

While the first quarter is not yet over, gold is showing signs of further weakness. Bullion holdings of exchange-traded funds have been falling, bullish bets on U.S. gold futures are at low levels and physical demand has been slow to respond to lower prices.

Stock markets, meanwhile, have made a strong start to the year, with the Dow Jones Industrial Average up 7.3 percent, on hopes that efforts to boost global liquidity, such as the Fed's quantitative easing program, are taking effect.

"As the need to hedge an unpleasant outcome for the global economy diminishes, and as equities look a better investment and other assets classes start to generate decent returns, gold is naturally going to find it harder to attract fresh money," Credit Suisse analyst Tom Kendall said.

Credit Suisse cut its average gold price forecast for 2013 to $1,740 an ounce in early January from $1,840 an ounce, and sees gold easing to $1,720 in 2014 and $1,500 in 2015. City also cut its 2013 forecast that month to $1,675 from $1,750.

Other banks expect gold prices to top out further down the curve. Even some banks that forecast a good performance in 2013 and 2014 are predicting a drop in average prices after that.

Standard Chartered sees gold at $1,900 an ounce next year but forecasts a drop back to $1,700 in 2015.

Deutsche Bank and Morgan Stanley, like Bank of America-Merrill Lynch, also expect prices to climb in 2013 and 2014 but predict a correction the following year, albeit to a strong average of $1,800 an ounce and $1,750 an ounce, respectively.

Banks with a more positive view over the next few years say that ultra-loose monetary policy and the threat of further economic problems in the United States and Europe will continue to favor the metal.

"One has to convince oneself that macro risks are behind us and we're looking at a much more healthy global environment, and I question whether that is really the case," Deutsche Bank analyst Daniel Brebner said.

"Italy is a risk area, and it's not alone. There are lots of areas that are looking quite challenged, so it's a little early to give up on some of those safe haven assets."

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More and more major banks are breaking away from the consensus for continued gains in gold prices as an incipient return to growth of the global economy has undermined the argument for holding the precious metal.
Tuesday, 05 March 2013 10:32 AM
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