As we near spring and head into “March Madness,” better-than-expected numbers on retail sales and unemployment in the U.S. has led to a slight sell-off in gold. As of this writing, gold stands at just under $1600 per ounce – so far this year, gold is down about 5% from its close on December 31, 2012.
Besides a strengthening dollar – currently at a 7-month high against a basket of currencies – gold has also been weighed down by a massive outflow from the exchange-traded funds, or ETFs. Just yesterday (Thursday, 3/14), assets in gold-backed ETFs fell to 2,470.877 metric tons, the lowest level since September according to a report from Bloomberg.
“As long as the U.S. economy is coming back we do not think gold prices can rise,” comments Henry Liu, head of commodity research at Mirae Asset Securities in Hong Kong.
Positive economic numbers have certainly led to an exodus from gold (contracts and funds) and other “safe-haven” assets into stocks. Just last week, the Dow reached an all-time record high, beating out its 2007 record of just over 14,000. All of the so-called positive numbers are leading many to speculate the Fed will either scale-back or completely terminate its quantitative easing programs.
These “QE” policies have served to rocket gold to record highs. While the impact of stimulus isn’t as noticeable as it once was, withdrawing this easing could weigh on gold in the short term.
With news like this, it would seem the bears are in the driver’s seat – though forecasts and opinions vary far and wide.
Positive data has fueled speculation that the U.S. recovery is on firm footing, though not everyone is convinced, including us.
With big names like George Soros and Warren Buffett claiming gold’s run is over and set for a big decline, John Paulson says not so fast. You may not know Paulson, he’s a hedge fund manager that made billions by betting against subprime mortgages during the housing bubble – while everyone was rushing in, Paulson was cautious.
When the bubble popped, Paulson made billions on his “short” positions in the subprime market.
Since, he’s been one of the ardent proponents of investing in gold bullion. He holds a 5% stake in the SPDR Gold Trust ETF and has tremendous personal exposure in gold and other metals.
In a letter to investors, Paulson wrote – “Despite the volatility and drawdown of our gold equity positions, we believe in the long-term [emphasis added] outlook for these positions as quantitative easing programs continue around the world, credit expands in the United States, and gold equities continue to trade at a significant discount.”
Investment bank/broker forecasts
In light of recent developments, some of the larger investment banks (e.g. Goldman Sachs, BNP Paribas, Credit Suisse and Citigroup) have cut their forecasts for gold. One forecast from Goldman was especially attention grabbing with the bank cutting its forecast from $1810 by year’s end to $1600. Goldman also predicts the gold price will be even lower ($1450) by the end of next year.
However, there is no consensus, as Bank of America Merrill Lynch still expects gold to rise to an average price of $1838 in 2014 (NB: they do predict prices will turn lower in 2015).
Other consultants and analysts, notably Capital Economics in the UK, predict gold will reach a new record of $2000 per ounce later in 2013. They warn that Eurozone troubles will flare up again and the current rally in equities will run out of steam. Capital doesn’t see the current exodus from ETFs as driving the price in the future. Rather, they claim the current events are reflecting what has already occurred.
While news may seem gloomy, we’re still positive on gold and precious metals
Some may look at this as a sign that now isn’t the time to invest in gold bullion and other precious metals. However, we largely agree with Paulson that continued troubles in Europe, expanding credit, and monetary stimulus will serve to keep gold strong in the long-term. Another point he didn’t mention was the fact that central banks are expanding their reserves of, you guessed it, gold.
Another thing to remember – other metals like platinum, palladium and copper could do very well if the world economy is indeed recovering. So even if gold is experiencing turbulence in its multi-year bull run doesn’t mean you should ignore precious metals altogether.
What are your thoughts?
Do you think gold is headed down for the next year or two? Do you think a recovery is afoot in the U.S., or is this a temporary jolt resulting from years of monetary stimulus?
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