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
"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
such as the SPDR Gold Shares (NYSEArca:GLD) and the iShares Gold
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
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
"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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