Smart money betting against gold
You wouldn't call it a consensus yet, but there is a growing body of opinion that the great gold price boom is a goner. This is actually a positive call. Banks including Goldman Sachs, Citigroup and Societe Generale believe gold's time in the sun is over because the world is finally kicking clear of the global crisis.
There's an interesting counter theory, however. Gold is in limited supply, unlike the US dollar, the British pound, the euro and the Japanese yen. The debasement of those currencies that is both a byproduct of the global crisis and a response to it through quantitative easing might keep gold higher for longer.
Goldman Sachs this week lowered its gold price forecast for the second time in less than two months and recommended that clients sell the metal in the face of what it said was an accelerating downturn.
Gold was around $US600 an ounce ahead of the global crisis. It peaked at $US1900 an ounce in September 2011, and has fallen from $US1792 an ounce in early October last year to about $US1560 now. Goldman tips that it will be $US1450 an ounce by the end of this year, and $US1270 an ounce by the end of 2014.
Societe Generale put a 2013 price target of $US1375 on gold last month, and at the start of this month said it could fall by between 20 and 30 per cent in a "perfect positive macro storm" - a powerful economic rebound that pushed the US 10-year bond yield up from about 1.8 per cent to 3 per cent this year. SocGen put the probability of that happening at about 20 per cent, but gold will certainly face headwinds as the global economy recovers and rates and yields rise.
In a report last month Citigroup noted that gold moves in very long price cycles. "If it is in the process of peaking now, it could go into hibernation for a long, long time," Citi said, adding that global systemic risk would need to be higher than it was in 2011 and 2012 "to warrant an argument that gold's bull market is not over".
Systemic risk has in fact been easing, and given that "we need the US dollar to collapse in order for gold not to be peaking now", Citi added. That's not probable, and the group's private banking unit is reported to have now removed gold from its investment asset mix, telling clients that with global growth strengthening "demand for gold as protection against systemic risk has dissipated".
There are other signs of a sea change. Hedge funds including George Soros' Gold Management Fund and Louis Bacon's Moore Capital Management have reduced their exposure to exchange-traded gold funds, and the amount of bullion underpinning physically backed gold exchange-traded funds has fallen by about 7 per cent this year.
The ratio of buyers to sellers on the New York Mercantile Exchange (Comex) also narrowed from a long-term average of about six times to two times in February, and a decline in inflation-adjusted interest rates in the US this month has not given the metal impetus.
Gold's sensitivity to market ructions and weak economic reports also appears to have declined. Until it slipped below $US1600 an ounce in February this year it traded between $US1600 and $US1800 for 15 months despite big mood swings in the market over Europe's Sovereign debt battle and political standoffs in the US over debt limits and budget cuts. Goldman notes in its report this week that the gold price has also been falling more often than rising in March and April when worse-than-expected US economic data is released.
The big post-crisis argument in favour of gold is that it is not just a precious metal but an alternative, incorruptible currency - the benchmark against which the debasement of all other currencies is measured.
As Canada's Sprott Asset Management group put it after SocGen's bearish gold report came out, "Total gold supply can only grow marginally, while fiat money supply can grow exponentially through printing programs. That is why gold's monetary value is so important - it's the only 'currency' in play that is immune to government devaluation."
With the Fed continuing to inject $US85 billion a month of new money into the US economy every month for the rest of this year at least and Japan's central bank now embarking on quantitative easing of about $US75 billion a month, further declines in the gold price are highly improbable, Sprott argues. SocGen's end-year target of $US1375 an ounce implies a 15 per cent contraction in the size of central bank balance sheets that are actually still expanding, it says.
One question, however, is whether the markets load in QE as it is progressively applied, or when it is announced. The Fed's expanded QE program was announced in December last year, and Goldman believes that it is already fully priced by the markets, including the gold market. As it also notes, bond yields will rise in the US before QE concludes: the weight of money betting that gold's run is over appears to be building.