Credit Suisse Says Gold Going Below $1,100

By Olly Ludwig,

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The price of gold, which fell sharply in the wake of the Cyprus banking crisis in early spring, could end up dropping to as low as $1,085 a troy ounce in the latest sign of growing sentiment that the 12-year rally in gold may well be running its course, according to a research note from Credit Suisse.

Such a drop would be one-fifth below the current price of roughly $1,376 an ounce, more than one-third lower than at the end of last year, and about 45 percent below that cycle high of $1,921 reached in 2011 not long after Standard & Poor's downgraded U.S. sovereign debt.

While Credit Suisse turned bearish on gold in February, the latest prediction is a departure from that call in that the investment bank now acknowledges the decline has been more rapid than it originally foresaw, and that it now foresees more relatively sharp declines ahead.

"We turned outright bearish on gold at the start of February but the subsequent sell-off has happened sooner and more rapidly than we expected," the research analysts who wrote both reports, Tom Kendall, Ric Deverell, said in the latest report. "Perhaps it should not have been a surprise-financial bubbles tend to unwind faster than they inflate-'stairs up, elevator down.'"

The rationale behind the February call was Credit Suisse's sense that the most fear-inducing chapter of the post-2008 crash environment began to draw to a close after the European Central Bank's July 2012 decision to finally commit to being the lender of last resort to help the eurozone weather its debt crisis. The cornerstone for a slow recovery was finally in place, which undercut gold's fear-based allure.

Behind the latest call, published last week, is that the other major motivation for buying gold since the crisis-namely to hedge against inflation in the face of rapid expansion of central bank balance sheets, simply hasn't been necessary. In fact, it's been difficult to create any inflation at all, and a significant increase in the velocity of all the money sloshing around in the economy has not yet come to pass.

"Financial markets have decided that the remaining risks can be navigated in relative safety and so a growing number of investors think the opportunity cost of gold is too high a price to pay," the report said.

"If we were to pick an 'ideal' ultimate target for the sell-off though, it would be $1,085," the report continued.

Physical Demand Likely To Falter

In this context, more than 450 tonnes of gold has arrived on the market for sale so far this year, largely due to liquidation of positions in gold ETFs such as the SPDR Gold Shares (NYSEArca:GLD) and the iShares Gold Trust (NYSEArca:IAU).

GLD has suffered more than $16 billion in redemptions so far this year and, including a nearly 18 percent drop in price, has gone from being a $72 billion fund at the end of 2012 to a $45 billion fund. That 38 percent decline in assets has dropped GLD from the No. 2 slot among the biggest ETFs to the No. 4 spot, and redemptions have been almost daily recently, according to data compiled by IndexUniverse.

Much of that gold supply has been absorbed by physical demand from the jewelry and retail investment sectors in the Middle East, India, South East Asia and China, Credit Suisse said.

"However, even the massive rush of demand has not been sufficient to prevent the gold price from sliding back under $1,350," the report said.

Still, Credit doubts such buying interest will persist at current prices, given that central banks are likely to begin taking incipient steps to reduce all the monetary stimulus before long, at which point more gold will hit the physical market.

"So if, as our US rates strategists and economists expect, the Fed will signal a reduced rate of QE before the end of the year, it is not unreasonable to think that at least another 435 tonnes or so could enter the market as the eventual withdrawal of stimulus gets priced in," the report stated.

"And we do not think that demand is open ended-it will be satiated at some point and we expect that point to arrive within the next two to four weeks," the report, which was published on May 22, included.

Credit Suisse noted that notwithstanding the decline in gold so far, the yellow metal still remains pricey by historical standards-and relative to other hard assets such as base metals and real estate.

"Those who argue gold will prove its worth as a store of value over the very long term may well be proved correct, but it is also right to point out that other hard assets may offer better defense against moderate-say 2 percent to 4 percent CPI-inflation over the short to medium term," the report said.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: GLD , IAU

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