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SocGen Analyst: Gold, Now Below $1,200, Headed for $1,000

Thursday, 30 October 2014 08:04 PM

Societe Generale SA’s Michael Haigh says the chances are increasing that gold will drop to $1,000 an ounce as the cost of oil tumbles.

“The oil-price shock is adding more ammunition to the downward pressure on gold,” Haigh, who correctly forecast gold’s 2013 rout, said in an interview in New York. Cheaper energy “means lower inflation and adds to the bearish gold story,” he said.

Bullion fell below $1,200 Thursday, erasing its gains for the year, after the government reported that the U.S. grew at a faster pace than analysts forecast in the third quarter. A stronger economy is validating optimism that prompted the Federal Reserve to say Wednesday that it will stop buying debt, further diminishing the appeal of precious metals as an inflation hedge.

Crude oil has tumbled 23 percent since the end of June, touching a two-year low this week. The fuel’s slump into a bear market is “going to have an effect on the cost of production of other commodities, which means downward pressure on costs, which is a good thing,” Haigh said. “The U.S. growth story is the other headwind” for bullion, he said.

Demand for precious metals as a protection of wealth has been eroded by the outlook for a strengthening U.S. economy, which helped spark a rally in the dollar as the Standard & Poor’s 500 Index of equities surged to a record in September. The American labor market has had “solid job gains,” Fed policy makers said Wednesday as they ended their third round of asset purchases.

‘Gradual Grind’

Gold futures for December delivery fell 2.1 percent Thursday to $1,198.60 on the Comex in New York, leaving the metal down 0.3 percent in 2014. Prices touched this year’s low of $1,183.30 on Oct. 6.

“There will be a gradual grind down” for gold, Haigh said. “Prices are going to go down to $1,000 over the next two years.”

Gold climbed 70 percent from December 2008 to June 2011 as the U.S. central bank bought debt and held borrowing costs near zero percent in a bid to shore up growth. Prices slumped 28 percent last year, the most in three decades. Speculation that the Fed’s almost $4 trillion of bond purchases since 2008 would cause runaway inflation has yet to be proven.

Rising interest rates reduce gold’s allure because the metal generally offers investors returns only through price gains, while a stronger dollar typically cuts demand for a store of value.

ETP Holdings

Holdings in gold-backed exchange-traded products are heading for a third straight month of losses, reaching the lowest in five years this week.

SocGen’s Haigh isn’t alone in predicting more losses for gold. Goldman Sachs Group Inc.’s Jeffrey Currie, the bank’s head of commodities research who also correctly forecast 2013’s bullion slump, said last month that the worst isn’t over yet for gold. He expects prices to drop to $1,050 by the end of year.

Last quarter, gold dropped 8.4 percent even with escalating political tensions in Ukraine, protests in Hong Kong and the spread of Ebola.

Turmoil like the kind currently sweeping the world often drives investors to the metal. Instead, the perceived haven today is the U.S., where a strengthening economy and low inflation are increasing demand for dollars and dollar- denominated assets.

Crude-oil futures in New York fell to $79.44 on Oct. 27, the lowest since June 2012. The drop signals lower costs for American companies and making it less likely investors will look for inflation hedges, such as gold.

“The oil story should not be ignored,” Haigh said. “Lower oil prices have a ripple effect on other commodities.”

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Societe Generale SA's Michael Haigh says the chances are increasing that gold will drop to $1,000 an ounce as the cost of oil tumbles.
SocGen, Analyst, Gold, 1000
Thursday, 30 October 2014 08:04 PM
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