April 3, 2013 6:21 pm

Banks take bearish view on gold

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Gold is once again suffering, falling well below the $1,600 a troy ounce support level, as more banks take a bearish view on the precious metal in spite of renewed financial turmoil in the eurozone.

Société Générale this week released a report headlined “The end of the gold era” that has spooked investors, only a few weeks after Credit Suisse sent a note to clients titled “Gold – the beginning of the end of an era”.

Ric Deverell, head of commodities research at Credit Suisse in London, said: “Gold remains a long way above historical means – in real terms and relative to other assets – and we expect some of that premium gradually to dissipate.”

The negative views are hurting the precious metal, with investors in physically-backed exchange traded funds withdrawing assets in large quantities. February saw the largest monthly outflow of gold from ETFs on record.

Spot gold prices in London on Wednesday fell to $1,559.55 a troy ounce, down 6.8 per cent since January. The precious metal is approaching the eight-month low of $1,554.49 per ounce it set in February. Analysts believe that if gold falls to that level a new wave of selling will emerge.

The sell-off is partly a reflection of broader negative sentiment towards gold, as investors become more confident of global economic growth and put their money into riskier assets such as equities. The S&P 500, the US equity market index, recently rose to a record high close.

The metal briefly benefited from the financial turmoil in Cyprus, but investors have cashed in quickly on the small rally. Analysts are concerned that previous bullish drivers, such as central bank injection of more liquidity into the leading economies, are no longer boosting gold prices. At the same time, gold prices remain high for buyers in India and China, and hence physical demand is lacklustre.

Patrick Legland, at Société Générale in Paris, said in a note that investors have pushed gold sharply over the past five years on fears that aggressive actions by central banks to revive economic growth will lead to high inflation.

“But inflation has so far stayed low and now we are beginning to see the economic conditions that would justify an end to the Fed’s quantitative easing,” he said.

But analysts believe any further price drop will be moderate, as investors remain risk averse and further financial trouble in Cyprus will trigger panic buying. Bearish analysts are targeting prices around $1,500-$1,400 per ounce by the end of the year, roughly 10-15 per cent below current levels.

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