LITTLE GLITTER FOR GOLD IN 2014 / THE FINANCIAL TIMES

December 27, 2013 10:08 am

 

Little glitter for gold in 2014

 

By Xan Rice and Jack Farchy

 

©AP

Uncertain future: to make a bet, traders need to decide where gold will go next

 

 

 

At the end of each year since 2001 anyone with gold in their investment portfolio would have had reason to smile. The price of the metal rose every 12 months, from $271 a troy ounce to $1,670 an ounce by the end of 2012, a spectacular bull run.

 

But 2013 was the year the bull retreated. Faced with macroeconomic conditions seen as increasingly unfavourable to gold – persistently low inflation, an improving global economy, surging stock prices and, finally, an announcement of the phase-out of the US monetary stimulus programme – investors rushed to offload bullion. The metal lost more than a quarter of its value this year and looks certain to record its first price fall in 13 years. The bad news for “gold bugs” is that a fast rebound appears unlikely.
 
“The deck is pretty much stacked against gold next year in terms of economic developments,” says Philip Klapwijk, managing director of Precious Metals Insights, a Hong Kong-based consultancy.
 
“We will continue to see disposals . . . but I don’t think it will be on the scale of this year.”
 
Mr Klapwijk predicts an average price for 2014 of $1,170 an ounce, 2.5 per cent below the current price of $1,200 an ounce with a trading range between $1,050 and $1,400. Other analysts are similarly downbeat about gold; on December 2 UBS lowered its forecast price from $1,325 to $1,200. The head of precious metals trading at one investment bank in London reckons gold could fall to $950 an ounce early next year before recovering slightly.
 
“Selling is ongoing and some people are saying: do we go to $700 or $600?” one trader says. “That’s too dramatic. There is still enough people that will say: we need a bit of gold for insurance.”
 

The tumble in the gold price was largely the result of a sell-off by western investors in gold exchange traded funds (ETFs). Holdings in the 14 biggest such funds, which reached record levels in 2012, have plunged an average of 31 per cent this year, according to Bloomberg data – the first yearly decrease since the funds began trading a decade ago. Assets in the SPDR Gold Trust, the largest gold ETF, have dropped to 818.9 tonnes, the lowest level in nearly five years.

 

James Steel, an analyst at HSBC, says that interest from western investors in gold is likely to remain weak into 2014 due to the tapering of the US Federal Reserve’s $85bn-a-month bond-buying programme, which could result in a stronger dollar and send bullion prices lower.
 
Another factor will be the demand for physical gold – bars, coins and jewellery – which is increasingly dominated by countries in the east. The important Indian market suffered in 2013, thanks to new tariffs imposed by India’s government on gold imports. Barring a policy change, weak sales in India are likely to continue. The one bright spot this year has been China. Gold jewellery demand there surged by more than a third in the first nine months of 2013 compared with the same period in 2012, according to the World Gold Council.
 
“White-hot demand from China will continue, though possibly not at levels that we have seen this year,” says Mr Steel.
 
China is expected to import more than 1,000 tonnes of gold this year, overtaking India as the world’s biggest consumer of bullion. However, many analysts and investors believe the state rather than consumers could be behind the surge in imports.
 

“The total amount of gold being consumed in China is a gigantic quantum and you have to wonder where that gold is going,” Evy Hambro, chief investment officer of BlackRock’s Natural Resources Equity team, said in a recent interview with the Financial Times. “Is it going on to wrists, ears and necks or is it going into state reserves?”

 

Longer term, prospects for gold do not appear rosy. UBS forecasts that the price of the metal will remain at or below current levels for the next few years, ending at $1,210 in 2017.
 
“The struggle for gold not only rests with the predominant selling interest among investors currently, but with limited positive catalysts going forward, gold is unlikely to regain its former appeal,” the bank said in a recent note.
 
Regarded as a haven for investors in times of global political and economic uncertainty, gold has proved less sensitive to bad news in 2013 than in previous years. That is not to say that the price will not spike should something unexpected occur, such as a downturn in the US economy, a sharp fall in stock prices or an increase in inflation.
 
“It’s tilting towards the bear side but people are unsure what will happen – we had a bull market for a decade and now it’s all changed,” says Joni Teves, of UBS.
 
 
Copyright The Financial Times Limited 2013.