(Kitco News) - Gold prices are set to end a 12-year bull run in 2013, as values are likely to end down about 20% versus last year, with the yellow metal pressured by expectations for an improved U.S. economic outlook and the likelihood of the Federal Reserve tapering its quantitative easing program.
The question is: has the underlying structure for gold changed? Gold analysts say in the short to medium term, that is in the next year or two, the metal may be buffeted by a changing macroeconomic outlook, but the longer-term view still holds promise for a price rebound.
This year hasn’t been kind to gold. With a 20%-plus loss, as of mid-December, only corn, coffee and silver have worse performances, and a change of the calendar isn’t likely to change gold’s fortunes.
Jordan Eliseo, chief economist of ABC Bullion in Sydney, tallied some of the reasons why gold is so bruised this year: “You have flows coming out of ETFs (exchange-traded funds). Western asset managers despise gold, and sentiment (is at) all-time lows. They’re seeing stocks hitting all-time highs on an almost daily basis, so they’re wanting to participate in that and not come back to gold, not for some time.”
Much of gold’s weakness comes from the Fed signaling that they are going to start reining in their bond-buying program because the U.S. economy is starting to improve. While other markets were affected by the Fed talking about starting to end their extraordinary monetary policy, few markets have reacted to it like gold.
When the Fed embarked on this ultra-loose monetary policy five years ago, many pundits said inflation would rage uncontrollably. That hasn’t happened, so far. The U.S. consumer price index, an inflation measure, rose only 1% for the 12 months ending October, well below the Fed’s 2.5% inflation gauge. Low inflation means investors don’t need gold to hedge against rising prices.
Meanwhile, U.S. Treasury yields rose in anticipation of reduced stimulus, along with the U.S. dollar. High interest rate yields make gold a less attractive investment since the metal has no yield, while a stronger greenback weighs on gold because it is denominated in dollars.
All of these factors pulled gold down to its lowest levels since mid-2010. Market watchers said gold will wrestle with these themes in the early part of 2014, too.
Several investment banks are forecasting continued weaker prices for gold, with CIBC suggesting that the yellow metal will end 2014 at $1,000 an ounce, and Goldman Sachs saying gold prices will close out next year around $1,050. Others, such as UBS and Citi Research see gold averaging $1,200 and $1,255, respectively, in 2014. Only a few banks like Commerzbank said gold will shake off its weakness to climb back toward $1,400 by December 2014.
The biggest near-term influence for all markets, including gold, will be when the Fed starts its tapering, analysts said. The Fed’s actions are data-dependent, meaning that the Fed will use stronger economic data as a guide for when to start curbing stimulus. Most market watchers expect the Fed will start in March, which will be Fed Vice Chair Janet Yellen’s first Federal Open Market Committee meeting as Fed chief, provided she is confirmed. Some say tapering could come as soon as the January meeting.
Tommy Capalbo, precious metals broker at Newedge, said nearby gold prices could slip to $1,155 in the months leading up to the Fed’s March decision. That’s the 61% Fibonacci retracement level from the all-time nominal high of $1,923.70 on a futures spot continuation chart, and just under the 2013 low of $1,179.40 from June.
“With the lack of inflation and the belief that tapering will -- and must -- occur by the end of 2014, gold is going to be facing a tough uphill fight to rally into the first quarter of 2014,” he said.
Eliseo said having the Fed actually start the tapering process could be good for gold.
“The threat of QE tapering has hung over the gold market all year. The Fed has threatened, but hasn’t done it. In some way a $10 to $15 billion taper would be good for gold in the sense to clear away the uncertainty in that environment,” he said.
Where gold goes after that is anyone’s guess, he said. “The short-term outlook is incredibly cloudy,” he added.
Deutsche Bank analysts said just how far gold prices fall in 2014 depends on how high interest rates rise, U.S. dollar strength and the strength of the U.S. equity markets.
“The bearish bet seems to be the best play in the beginning of the first quarter, with aims of a $1,100 price target by end of the second quarter/beginning of the third quarter,” Capalbo said.
Physical demand from Asia will help keep a floor in gold, he said. This year buying by China has helped to at least take some of the supply offloaded by investors selling ETFs, analysts have said.
Eliseo said it’s possible that China could give an update of its gold reserves, which stand at 1,054.1 metric tons, according to International Monetary Fund data. The last time was in 2009, he said, and they generally update the status every five years. “There are some ideas it could be between 3,000 and 5,000 tons,” he said.
Shawn Hackett, president of commodity advisory firm Hackett Financial Advisors, said gold’s 21st century rally is pretty astounding in and of itself, so to see it end lower for the first time in 12 years shouldn’t be too surprising.
“To have an asset go up (12) years in a row is unheard of. It’s an extraordinary period of bullishness, so it’s going to take an extraordinary period of bearish to unwind that excess. That doesn’t mean that there’s going to an acceleration of the decline,” he said. “Given the incredible uptrend we’ve had, it seems to me we need more than a year or two of bear (movements) to unwind it.”
Eliseo said gold’s weakness this year is cyclical and is “a much-needed correction within a secular bull trend.”
So not unlike a sports team that needs a reorganization after hitting a rough patch following a winning season, gold may need its own “rebuilding year.” It just may take more than a year, market watchers said.
Hackett said it’s possible gold will trade in an extended range of $1,000 to $1,300 “for a couple of years,” and that investors might lose interest in it.
“I see a boring, laborious market … the kind that puts (people) to sleep. Everyone will become completely disgusted and get bored. When … people don’t want to talk about it anymore, that’s when the bull move takes place. The next bull market will happen when no one is ready for it; no one is expecting it or projecting it,” he said.
Eliseo said while the short-term outlook is cloudy, in the longer-term, the next three to five years, precious metals will be one of the best-performing major asset classes because “ultimately gold is a play not just against the U.S. dollar, but financial assets in general.”
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By Debbie Carlson firstname.lastname@example.org