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January 3, 2014 8:58 am

Gold bulls lose faith in bullion’s allure

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Last year’s losses battered the metal’s reputation as a store of value

Here’s an activity for the mean-spirited: read what analysts were saying about gold a year ago.

Nearly all believed the metal would rise in 2013, according to the London Bullion Market Association’s annual survey. Even the most conservative saw only tiny declines. “We remain gold bulls,” Joni Teves of UBS said in a view shared by many. Analysts issued an average price forecast of $1,753 per troy ounce.

Instead, gold averaged $1,411, suffering its first down year in 13 and worst year since 1981. By New Year’s eve the price was $1,202.

The collapse has battered gold’s reputation as a store of value. Yet many factors that analysts saw as important to the market came true. The lesson is that it’s possible to get the context right and still get the price dead wrong.

Gold, perhaps more than other assets, depends on market sentiment. For a commodity that is held, not consumed, attitudes are paramount. “Gold prices are what they are because of the faith of investors,” says Jeffrey Christian, managing partner of CPM Group, a commodities consultancy.

As analysts search for logical explanations for gold’s moves, investors are their own powerful force driving prices as they buy and sell bars, coins or bullion-backed exchange traded funds. This is not the case in other commodities, where speculators generally avoid owning physical supplies. So guessing future gold prices is as much a matter of divining the faith of investors as gauging mined production costs or import restrictions in India.

Analysts thought – or thought that investors would believe – that monetary stimulus unleashed by central banks would erode the value of currencies, rendering hard assets such as gold more valuable. As the Federal Reserve embarked on its first two rounds of quantitative easing in 2008 and 2010, gold rose apace. It stood to reason that a third round would be even more bullish.

“Gold should derive support from ongoing accommodative monetary policies by the US Federal Reserve and other central banks,” James Steel, analyst at HSBC, told the LBMA survey last January.

But when the Fed launched “QE3” in September 2012, gold was already a year past its all-time high and headed lower. Japan’s aggressive stimulus under Shinzo Abe also failed to arrest the fall.

Gold had already been pounded before Fed chairman Ben Bernanke outlined his thinking on how to slow QE3. When the Fed finally approved a tapering programme last month, it coupled the announcement with a commitment to hold down interest rates. In theory this might have boosted gold. It didn’t.

“Gold can be completely disconnected from reality,” says Troy Gayeski, partner at SkyBridge Capital, a $9bn fund of hedge funds that ended its gold exposure in late 2011.

The biggest factor driving gold prices in the past year has been the behaviour of investors. Some certainly react to central bank policies and factors like growing jewellery sales in China. Others are “tactical,” chasing momentum while it lasts. The fact that stock markets rose about as much as gold fell last year clearly disillusioned some of the less committed.

Investment demand for physical gold fell 25 per cent last year, according to CPM Group. Exchange traded funds that keep gold in vaults on behalf of investors have dumped nearly 30m ounces from a high of 84.6m ounces at the end of 2012, Bloomberg data show. Once investors began unloading their hoard, it became a self-fulfilling prophecy for gold prices.

LBMA has not issued results of a 2014 survey yet. Individually, analysts seem very cautious this time around. Barclays sees gold averaging $1,310. “We still believe that gold’s woes are likely to build further,” the bank said last month. “Investor sentiment is likely to struggle to change course.”

Gold bulls and the fund managers that cater to them can only hold out hope that analysts are as wrong now as they were a year ago.

“Very, very few analysts are bullish gold or bearish equities. That was certainly not the case this time last year. The contrarian case is quite strong now for gold,” says Michael McGlone, US director of research at ETF Securities, which offers funds holding gold and other metals.

gregory.meyer@ft.com

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