Gold Dives To New Low -- Why It Could Lose Another 20%
The market poured more salt into the gold bulls' wounds Wednesday as precious metals prices sank to new lows.
The decline came as the dollar continued rising despite lower-than-expected economic growth numbers. That economic news eased fears of a tapering in the Federal Reserve's stimulus program, which has helped bolster gold in the past.
GLD is trading 23% below its 40-week moving average, indicating it's much more oversold now than at its October 2008 bottom, when it traded 18% below that key line. GLD traded only 5% below its 40-week when it troughed in October 2006.
"It's trading on a very psychological basis rather than to actual fundamental drivers," said Adam Grimes, chief investment officer at Waverly Advisors in Corning, N.Y.
Longview Tactical Allocation , a mutual fund with $25 million in assets that Grimes co-manages, started shorting gold futures June 7 to profit from falling prices. His ultimate price target is $850 an ounce, down 31% from Wednesday's price. He agrees gold is very oversold but says it can keep getting more oversold.
"Watch for news of gold producers shutting down because of market prices (falling) below production cost to mark the bottom," said Tom McClellan, founder of the McClellan Market Report.
It costs miners about $1,000 to produce an ounce of gold, Fourth Quadrant Asset Management CEO Patrick Hejlik estimates. He believes gold should trade around that price given the ample supply amid falling demand, especially from China and India. Those two countries account for nearly half of the global market.
"Slowing global trade limits central bank demand, as there is lesser need to hedge dollar-denominated trade exposure," Hejlik emailed.
India has raised gold-import duties from 6% to 8% to control inflow. At the same time, heavy depreciation in the rupee has raised prices. The physical buying craze in the Middle East, Asia and India seen in late April and May has faded and there's been significant stockpiling in China over the past two months, Credit Suisse analysts wrote in a commodities forecast released Wednesday.
They expect the yellow metal to sink to $1,150 an ounce in 12 months as the fundamental reasons for owning it as a safe haven in case of financial Armageddon and inflation have diminished. Global inflation is falling despite five years of quantitative easing in the U.S. and 12 in Japan. When the Federal Reserve normalizes monetary policy and allows interest rates to rise, investors will favor assets with yields.
Precious metals ETFs that hold gold, silver, platinum and palladium saw $1 billion, or 1.7% of assets, in outflow in the past week, according to TrimTabs Investment Research. Investors pulled out $1.7 billion, or 2.6% of assets, in the past month and $19.3 billion, or nearly 24% of assets, year to date.
ETF gold holdings have shrunk by 515 tons so far this year to 2,115 tons, according to Credit Suisse.
"Annual jewelry demand would need to grow by 20% to 25% year over year to absorb the ETF liquidation seen during just the first five months of this year," Credit Suisse analysts wrote.