How low can gold go?

China , Commodities , Currencies , Gold , Japan , Metals , US Dollar , USA Nov 04, 2014 No Comments

GoldGold for December delivery slipped 0.1 percent to $1,170.60 an ounce by 7:55 a.m. on the Comex in New York. Prices declined as much as 0.9 percent to $1,161 earlier today, before rebounding. Bullion for immediate delivery retreated 0.2 percent to $1,170.99 in London, according to Bloomberg generic pricing.

Gold and silver sank to their lowest since 2010 on Friday as the dollar surged against the yen and other major currencies after the Bank of Japan shocked global financial markets by expanding its massive stimulus spending, dampening demand for the precious metal.

Gold rose 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs near zero percent. Prices slumped 28 percent last year, the most in three decades, on expectation that the central bank would scale back its bond-buying program that was put in place to fuel growth while failing to stoke inflation.

Gold prices dropped to the lowest level in 4 years as signs the U.S. economic recovery is on track fuelled fresh speculation the Fed could raise interest rates earlier than expected and boosted the dollar.

The U.S. central bank, which has held its key rate at zero to 0.25 percent since 2008, this week cited an improving job market in deciding to end bond buying, while maintaining a commitment to keep rates low for a considerable time. It also said inflation is running below its 2 percent target.

On Friday, the University of Michigan reported that its consumer sentiment index rose to a seven-year high of 86.9 this month from 86.4 in September. In addition, data showed that the Chicago purchasing managers’ index rose to a three-and-a-half year high of 66.2 in October from 60.5 in September, confounding expectations for a reading of 60.0.

The US Dollar Index, which tracks the dollar against a basket of international currencies, was recently at 87.20, up from 87.01 earlier. As the dollar strengthens, dollar-denominated gold becomes more expensive for buyers who use other currencies to fund their purchases. Moreover, gold doesn’t earn interest or dividends and has a tougher time competing with stocks and bonds when interest rates climb.

The U.S. unit hit a seven-year high against the yen after the Bank of Japan opted to boost its already massive bond-buying stimulus last week. It reached a two-year high against the euro due to market talk of further easing from the European Central Bank when it meets later this week.

The Bank of Japan last week raised its annual target for enlarging the monetary base to 80 trillion yen ($723 billion), up from 60 trillion to 70 trillion, sending the yen to a six-year low against the dollar. “Japan basically pushed gold over the edge as it triggered a major risk-on move,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, said by e-mail. Japanese stimulus, the Fed decision to stop bond buying and dollar strength have “been more than the market could cope with last week,” he said.

A catalyst for a recovery is lacking – with the Indian festival season winding down and China seemingly well stocked after record imports last year, physical buying has not filled vacuum. Cooling Chinese demand for gold has added to an increasingly gloomy global outlook for the precious metal, which slumped to a fresh four-year low on Monday.

Gold prices in Shanghai normally carry a premium to global prices, but that reversed to a rare discount today. The premium, which is attributable to capital controls, was $2 to $3 an ounce to London prices about a week ago.

The tepid demand is especially unusual as the premium typically rises this time of year as Chinese traders stock up on gold ahead of the Lunar New Year holiday, which is due in February. Lunar New Year is the peak gold-buying season in China. But the price move in Shanghai shows even Chinese buyers aren’t yet stepping in to buy at cheaper prices, betting that they may have further to fall.

“You would not have expected Shanghai gold to be at a discount,” said a leading Hong Kong-based executive with an international bank, who didn’t want to be identified. “The physical buying in gold has dried up.”

Premiums on the international price of gold in India, the world’s second-largest buyer, have also fallen by about a quarter to $12 an ounce since the end of October.

Societe Generale SA’s Michael Haigh says the chances are increasing that gold will drop to $1,000 an ounce as the cost of oil tumbles.

The oil-price shock is adding more ammunition to the downward pressure on gold,” Haigh, who correctly forecast gold’s 2013 rout, said in an interview in New York. Cheaper energy “means lower inflation and adds to the bearish gold story,” he said yesterday.

“There will be a gradual grind down” for gold, Haigh said. “Prices are going to go down to $1,000 over the next two years.”

SocGen’s Haigh isn’t alone in predicting more losses for gold. Goldman Sachs Group Inc.’s Jeffrey Currie, the bank’s head of commodities research who also correctly forecast 2013’s bullion slump, said last month that the worst isn’t over yet for gold. He expects prices to drop to $1,050 by the end of year.

Silver prices also tumbled, with the metal touching its lowest since March 2010 at $15.72 an ounce and its cheapest level compared to gold in more than five years. Silver trades as a cheaper, more volatile proxy for gold, and when the latter declines the former tends to do the same.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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