Gold's Drop to Lowest Since '10 Will Extend for Goldman Sachs

Friday, 20 Dec 2013 07:02 AM


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Gold closed at the lowest in three years as traders capitulated after the Federal Reserve said it would begin tapering its monetary stimulus, extending a slide that’s sending the metal to its biggest annual drop since 1981. Goldman Sachs Group Inc. says the declines aren’t over.

Bullion for immediate delivery fell 2.4 percent to close at $1,188.68 at 5 p.m. Thursday in New York, the lowest settlement since Aug. 3, 2010. Prices will drop to $1,050 by the end of next year, Goldman Sachs said Nov. 20.

Gold is heading for the first yearly decline since 2000 after investors lost their faith in precious metals as a store of value. The Fed said Dec. 18 it will cut monthly asset purchases, known as quantitative easing, to $75 billion from $85 billion. U.S. equities jumped to a record. Exchange-traded products backed by bullion lost about $73 billion in value this year, and mining companies wrote down at least $26 billion.

“Gold is now likely to grind lower throughout 2014,” Jeffrey Currie, Goldman’s head of commodities research in New York, said in a telephone interview. “Much of the expected price decline has been priced in as opposed to a more gentle process as the Fed backs away from QE. When the gold market sees these events, it usually tries to price it in immediately.”

Bullion reached an intraday 34-month low on June 28, less than two weeks after Fed Chairman Ben S. Bernanke concluded a policy meeting by saying bond buying would slow this year and he’d end the program in 2014. Gold rebounded in the next two months partly as the Fed chief said tapering will depend on economic performance, including during testimony to Congress July 17.

Paulson, Soros

The central bank’s decision this week means traders that were still holding out for a rally are now “throwing in the towel,” Frank Lesh, a trader at FuturePath Trading LLC in Chicago, said in a telephone interview.

Billionaire John Paulson, the largest holder in the SPDR Gold Trust, the biggest ETP, said on Nov. 20 that he personally wouldn’t invest more money into his gold fund because it’s not clear when inflation will quicken. Billionaires George Soros and Daniel Loeb sold their entire investments in the SPDR Gold Trust in the second quarter.

“Money always goes where it’s well treated,” Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees more than $1 trillion, said in a telephone interview. “If you were doing well in equities, you didn’t need to be in gold. As long as the economic data continues to gain traction, we should see see the dollar rise and the Fed continue to taper. That’s typically negative for gold.”

Bear Market

Gold futures for February delivery fell 3.4 percent to close at $1,193.60 an ounce at 1:45 p.m. in New York, the lowest settlement for a most-active contract since Aug. 3, 2010.

The price slumped into a bear market in April and has tumbled 29 percent this year. Some investors sold the metal amid low U.S. inflation and the equity rally.

Fed officials raised their assessment of the employment outlook, predicting the jobless rate will fall as low as 6.3 percent by the end of next year, compared with a September forecast of 6.4 percent to 6.8 percent.

Policy makers may hold interest rates close to zero percent even if unemployment falls below the 6.5 percent rate the central bank had cited as a catalyst for an increase, “especially if projected inflation continues to run below” the 2 percent goal, the Fed said a statement.

Record Prices

Gold rose 70 percent from December 2008 to June 2011 as the Fed pumped more than $2 trillion into the financial system. Futures have plunged 38 percent from a record $1,923.70 in September 2011.

Hedge funds and other speculators raised their net-long position in Comex gold by 25 percent to 33,449 futures and option contracts in the week ended Dec. 10, government data showed on Dec. 13. Short bets, which slid 6.7 percent to 74,312, are within about 7 percent of the record in July.

Gold will probably reach a bottom by April as the Fed “does whatever it takes” to reach their inflation target, Michael Pento, the president of Pento Portfolio Strategies in Colts Neck, New Jersey, said in a telephone interview.

Global equities have advanced to the highest in almost six years, and U.S. inflation is running at 1.2 percent, almost half the rate of the past decade. Gold ETP holdings slumped 32 percent this year, headed for the first drop since they started trading in 2003.

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