Gold Price Bubble Bursting: Societe Generale


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Investors hammered gold and silver prices to their lowest levels in nearly a year Wednesday even as the dollar weakened and a South African mining company was forced to halt operations owing to a labor strike.

Traders fled in droves this week after Societe Generale released a report contending the gold "bubble" is bursting in the face of rising interest rates, an improving U.S. economy, a strengthening dollar and "seriously oversupplied" physical gold market.

Spot gold prices dropped 1.2% Wednesday to $1,558 an ounce, a 10-month low.

SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, melted 1.21% to 150.73 a share on the stock market today .

PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, shed 0.31% to 22.50.

Gold will dive to $1,375 an ounce by year's end, down 12% from Wednesday's price, while trading at an average price of $1,500 an ounce during 2013, Soc Gen's analysts forecast. Gold prices climbed the past five years on fears that the Federal Reserve's quantitative easing programs, or QE, would lead to monstrous inflation. But inflation has been declining since 2011.

"Now we are beginning to see: 1) the economic conditions that would justify an end to the Fed's QE; 2) fiscal stabilization that has passed its inflection point; and 3) a U.S. dollar that has begun trending higher," Soc Gen analysts wrote in the report titled "The End of the Gold Era." "It seems unlikely that investors would want to add much to their long gold positions in this context. If so, the gold price would trend lower at pace as the physical gold market is seriously oversupplied without continued large-scale investor buying. Selling by investors would add fuel to the fire."

Gold ETFs have unloaded 140 tons so far this year and February saw the largest monthly outflow on record. That's in contrast to November and December of 2011, when gold prices fell 13%, while ETF inflows increased.

Germany, Libya and Venezuela all reduced central bank holdings in gold this year. China will likely limit its gold holdings to 2% of its total foreign exchange reserves because if it were to buy too much, gold prices would rise, hurting Chinese consumers.

Central banks will find gold less appealing a source of monetary diversification as the U.S. dollar appreciates, Soc Gen believes.

It estimates official holdings will fall from 536 tons in 2012 to 450 tons in 2013 and 300 tons in 2014.

All the while, mine output is growing. In response to rising gold prices and high margins the past few years, gold mining companies invested in new development and expansions to secure future supply. Soc Gen estimates mine supply of 1,750 tons in 2013, up 5.3% from 2012 levels.

Gold has fallen in tandem with panic selling in silver on expectations of weaker global demand for electronics, says Tom McClellan, publisher of "The McClellan Market Report." But the sell-off seems unjustified because of lacking evidence showing a slowdown in manufacturing worldwide.

"This smells like the case of famous Russian fire sale of gold more than a decade ago, which was supposedly done by Russia's central bank in order to raise funds for relief of Siberian flood victims," McClellan wrote in his newsletter Wednesday. "That story sent gold down 2% in one day (back when gold was trading in the $370s and it proved to be a colossal head fake."

He believes gold is oversold and due for a rebound.

Market Vectors Gold Miners ETF ( GDX ) plunged 4.54% to 34.25 -- its lowest price in nearly four years. Trading volume doubled average.Market Vectors Junior Gold Miners ( GDXJ ) plummeted 6.38% to 14.67, a fresh all-time low.

Gold Fields ( GFI ) plunged 5.6% as workers at its Tarkwa and Damang mines in Ghana went on strike, forcing the South African firm to stop production, Kitco Metals reported. Gold Fields said the Mineworkers Union has numerous disputes and there's no telling when the strike will end.

Gold Chart Action

From a technical perspective, the chart for gold futures and ETFs look very bearish. The shorter-term 50-day moving average fell below the longer-term 200-day moving average in February, forming the so-called cross of death or death cross -- a very bearish development. Gold has fallen 13% below its 52-week high and trades deep below its 200-day line, which is very bearish and presents significant overhead supply in which buyers who bought falling prices sell as prices rebound to break-even levels.

Increased volatility in trading recently suggests the potential for a larger breakdown in gold prices, says Andrew Barber, CEO of Waverly Advisors in Corning, N.Y.

Silver Prices

Silver prices tumbled 1.03% to 27.08, a new nine-month low.

IShares Silver Trust (SLV) fell 0.99% to 26.09 in heavy volume.

Global X Silver Miners ETF (SIL) crashed 3.71% to 16.59, an 11-month low.

Follow Trang Ho on Twitter @TrangHoETFs .

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: GDX , GDXJ , GFI , GLD , UUP

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