/ 11 February 2016

Gold price predicted to drop – after record high

Chinese demand for gold is tapering off after a surge just before the Lunar New Year.
People soon detect if you are not being genuine, says Mpho Maboi. (Graphic: John McCann)

Gold, after posting its biggest rally to start a year since 1980, will drop this month as Chinese consumers slow purchases that surged before the Lunar New Year, said eight out of 12 analysts surveyed by Bloomberg.

Prices that touched a seven-month high of $1 200.97 an ounce on Monday may drop to $1 100, based on average estimates from seven analysts providing forecasts.

After three annual declines, gold surged in 2016 as investors sought a haven from slumping equities and weaker economies, and Chinese consumers bought gifts before the Year of the Monkey began on Monday.

But seasonal buying in China, which accounts for more than a quarter of global demand for gold jewellery, drops off because shops close for at least a week of holidays.

Over the past decade, gold’s biggest monthly gain on average was in January, with small advances in February and losses in March.

“We’re already seeing a slowdown of trade with China,” said Robin Bhar, a London-based analyst at Société Générale, who predicts prices may drop to $950 this year.

The Goldman Sachs Group this week reiterated its December forecast that prices will drop for a fourth straight year, dipping to $1 000 by the end of 2016. The bank expects the Federal Reserve to increase United States interest rates at least three times, eroding the appeal of the metal because it doesn’t pay dividends like bonds or stocks.

Negative drivers may lead to drop
Gold for immediate delivery rose 0.2% to $1 191.54 on Wednesday, bringing this year’s advance to 12%, more than any other raw material tracked by the Bloomberg commodity index and the metal’s best start since a 24% gain in 1980 over the same period.

Before advancing 5.4% in January, the average increase for that month during the previous decade was 4.4%, about twice the next-largest gains seen in August and November. Since touching a record of $1 921.17 in 2011, gold rose in four of the past five Januaries, and prices dropped in three of the past four years in February and March.

Georgette Boele, a strategist at ABN Amro Bank in Amsterdam, said the metal may drop to $1 130 this month. “A stronger dollar, higher US rates and an improvement in investor sentiment will remain negative drivers for the metals.”

So far, though, the rally has shown little sign of fading. Hedge funds that were betting on price declines in early January have increased their bullish holdings in New York gold futures for four straight weeks to the highest since early November, US Commodity Futures Trading Commission data show. Holdings in exchange-traded funds backed by gold – which on January 6 were the lowest in more than six years – have gained every day for three weeks, according to data compiled by Bloomberg. In January, they expanded 3.8%, the most of any month in a year.

Although Goldman is forecasting higher US interest rates, investors have scaled back expectations for increases this year as global equity markets have sunk, oil has extended its losses and China’s economy has slowed. There’s no chance of an increase next month, according to data tracked by Bloomberg.

“We have had four years of losses in gold, but it seems the bottom has come in just at the moment when central bankers have again run into a wall,” said Adrian Ash, the head of research at BullionVault, an online trading service in London. “It’s clear that the Fed won’t be able to raise rates this year, and investors are taking another hard look at gold. This rally could get very interesting.”

Slumping equity markets are forcing some investors to seek alternative assets like gold. The MSCI all-world country index, a measure of global stocks, has tumbled 11% in 2016, the worst start to a year since the financial crisis in 2008.

“Sentiment towards gold seems to be turning, particularly given the stock market volatility,” Adrian Day, the president of Adrian Day Asset Management in Annapolis, Maryland, said last month.

For Adam Finn, the head of precious metals at Triland Metals in London, this year’s rally is more of a blip than a change in the long-term, bearish trend for gold.

Although prices rose above their 200-day moving average on February 3, these moves have been more reliable as a sell signal than a buy signal, he said. The previous three times that occurred, gold fell 4.6% the following month.

“The rally may well be running out of momentum,” Finn said this week. “We have seen these January rallies before and they often proved short-lived.” – © Bloomberg