The suggestion that the US could start to curb quantitative easing has led to gold traders adopting their most bearish stance January 2010 as further falls in the price of the yellow metal are forecast.
Gold spot prices suffered a 6.4 per cent fall to around $1,285 an ounce yesterday after Federal Reserve chairman Ben Bernanke said the central bank may slow its $85bn-a-month bond-buying programme if the US economy continues to recover.
The yellow metal has lost 22.5 per cent over the year to date and is down more than 30 per cent since its peak of about $1,900 in 2011. Commentators expect to see more falls – with some arguing the metal’s fair value is much lower than its current price.
A poll by Bloomberg found that 15 of 26 analysts expect the price of gold to see further falls next week, while five were neutral and six bullish. This is the most bearish response the survey has received in three-and-a-half years.
Blue Star Advisors president and chief investment officer Frederique Dubrion told Bloomberg: “The comments by the Fed are really the last signal for the soft hands that the bull market in gold is ending.
“One of the appeals of gold, especially since 2008, was because of quantitative easing. That they are going to slow down the pace of purchasing is not a good signal for gold.”
Gold was attractive during QE as it is a traditional hedge against inflation. However, the inflation that many feared would be caused by the unprecedented monetary easing since the crisis has failed to materialise, leaving many gold holders reassessing their position now it appears some of the stimulus could be withdrawn.
Some strategists argue that gold could come off another 20 per cent from its current levels to drop below $1,000.
Intelligent Investor resource analyst Gaurav Sodhi told CNBC: “$1,200 an ounce, or $1,000: all very possible. We have to remember gold prices have risen for 12 years in a row and they were due for a correction. Sentiment plays a very large role in determining its pricing.”
Barclays chief investment officer Europe Kevin Gardiner highlights gold, long-dated bonds and emerging markets as the most vulnerable asset classes to a tapering of the US’ QE programme.
He adds: “Perhaps the clearest call is on gold, whose perceived status as a store of value in the face of (over-stated) dollar debasement fears could receive a brutal debunking as the prospect of higher rates and yields gets closer and the dollar stays firm.
“Gold should be a low single-digit percentage holding for most investors.”
Argonaut Capital Partners chief investment officer Barry Norris says the level the gold price has reached can be compared to tulip mania bubble.
“If gold was fairly valued and a perfect hedge against inflation in 1968, and its price increased in-line with inflation since then, its fair price today would be $240 per oz,” says Norris. “The deviation between gold’s current price and its intrinsic inflation adjusted fair value of $240/oz could be categorized as an old-fashioned tulip mania asset bubble.
“Gold today looks like the ultimate high risk, low reward investment, rather than the commonly portrayed low risk, high reward investment.”