Where is gold heading?

Market’s mood is to sell before it sinks further.

By R. Chandrasekaran

The precious yellow metal had a bull run for about 12 years until 2012, providing a solid return to investors. However, a recent comment from the U.S. Federal Reserve about the possibility of stopping the easy money policy is turning out to be a nightmare for not only the traders but also those who are holding it. In a nutshell, there is a strong sense of selling the gold before it sinks further.

This could probably be the most significant bearish trend witnessed in over 40 months after 2010. The yellow metal lost its sheen by around 4.5 percent to break the psychological mark of $1,300 per ounce level after the Fed made known its stance.

The bearishness indicates a loss of more than 20 percent within a short span of three months. This comes on the back of an approximately 7 percent gain in the previous year. In April, it was trading around $1,600 per ounce compared to around $,1677 at the close of the year 2012.

The current price also suggests a whopping 33 percent drop from the all-time high of more than $1,900 per ounce recorded in September 2011. The latest gold price also indicates a drop of around 24 percent from the last year.

At the beginning of the year, some analysts and market experts were somewhat circumspect, while others were hopeful of another Bull Run year. While Citigroup kept a price target of $1,675 and $1,653 per ounce of gold for the year 2013 and 2014 respectively, Morgan Stanley estimated a more optimistic price of $1,773 and $1,845 per ounce of gold for the same period.

While the volatility in any market is not an unusual thing and gold is no exception, the current events and the trend could well point to a replication of what had happened in the early 1980s. There was 40 percent difference between the highs and lows of gold price in 1980 after the yellow metal touched $850 per ounce in January 1980, which was a record then.

It took more than two and half decades to breach $850 mark in 2008 though if inflation is taken into account, gold is yet to reach a record high. Analysts put it somewhere around $2,400 per ounce for the gold to break the earlier record high.

Historical annual closing of gold price from 2000 to 2012

Year

Close

%
change

2012

$1,664.00

8.68%

2011

$1,531.00

7.80%

2010

$1,420.25

30.60%

2009

$1,087.50

25.04%

2008

$869.75

3.97%

2007

$836.50

31.59%

2006

$635.70

23.92%

2005

$513.00

17.77%

2004

$435.60

4.40%

2003

$417.25

21.74%

2002

$342.75

23.96%

2001

$276.50

1.41%

2000

$272.65

-6.06%

Source: onlygold.com

From 2000 to 2013, the yellow metal has delivered more than 500 percent returns. Gold became a sought after commodity following the financial imbroglio in the United States after the housing bubble in 2008, sending many financial services provider to oblivion. This dampened the spirit of the investors in equities, and the bond markets became less attractive on easy money policy being pursued by the biggest economy in the world to stimulate growth.

As if the financial turmoil was not enough, Standard & Poor’s had downgraded the U.S. by a notch in August 2011, further accelerating the pace of flight of money to the bullion market.

Investments in gold reached about $3.41 trillion since 2008 after the U.S. government initiated quantitative easing with a view to help the economy revive and retrieve the lost employment opportunities for the Americans.

However, since the beginning of the current year, there has been a speculation about the Fed’s move to stop zero interest regimes and also end the bond buying program in a phased manner. Fed Chairman Ben Bernanke also hinted time and again that he was not afraid of extending the QE program as long as the economy needed it.

However, that changed recently. His comment on Wednesday was a clear indication of what is in store in the coming months on easy money policy. Anticipating such a move, gold worth 520.7 metric tons, worth approximately $21.7 billion, was sold by the exchange-traded funds in the current year alone.

The latest gold trend suggests a few things. One is that the Bull Run will most likely end in the current year. The second is various analysts have started cutting down their estimates on gold price for the current year. Now there is even speculation that gold price will come down below the psychological level of $1,000 per ounce mark. Societe Generale’s Head of Commodities Research Dr. Michael Haigh reportedly sees gold tumbling to $1,200 during the December quarter in the current year and to $1,000 by 2017.

Immediately, gold could see downside pressure and slip to $1,250 in a month, according a report quoting UBS, whereas Credit Suisse sees prices of $1,100 in a year.

While analysts and market experts may offer several reasons for the ups and downs in the yellow metal price, the fact is gold price is coming back to normalcy, to the pre-stimulus period after recording higher levels in the recent past which made it a highly costly commodity for the common man, particularly in the emerging markets.

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