Gold is in a “bubble” after the best annual run in at least nine decades and will head into a so-called bear market as a stronger U.S. economy helps increase interest rates and cut bullion demand, Societe Generale SA said.
Investors are unlikely to raise gold holdings because inflation has remained low, signs that the economy is improving may spur the Federal Reserve to curb stimulus and the dollar has strengthened, the bank said today in a report. Bullion is down 4.6 percent this year after 12 straight annual gains and would need to drop another 4.8 percent to mark the common definition of a bear market.
Prices fell this year as Fed policy makers debated the pace of asset purchases. Billionaire investor George Soros, who called bullion the “ultimate asset bubble” in 2010, cut his stake in the biggest gold exchange-traded product by 55 percent in the fourth quarter. Goldman Sachs Group Inc. said in February that bullion’s cycle has probably turned as the U.S. economy recovers and Credit Suisse Group AG has said the metal is unlikely to return to the 2011 record of $1,921.15 an ounce.
“The gold price is, in our view, in bubble territory,” Societe Generale analysts including London-based Robin Bhar wrote in the report. “Rising interest rates, driven in part by a positive view of the U.S. economy with an associated improvement in the dollar, could be the perfect storm to start a longer-term bear market.”
Gold for immediate delivery traded at $1,597.48 by 11:14 a.m. in London. While gold’s 1.2 percent advance in March was the first monthly gain since September, it posted the first back-to-back quarterly losses since the start of 2001. A close at $1,520.18 would be a 20 percent drop from Sept. 5, 2011, signaling prices entered a bear market.
Prices will slide to $1,375 by December and average $1,500 this year and $1,400 in 2014, Societe Generale estimates. The metal as much as doubled after central banks, led by the Fed, increased stimulus since 2008 to bolster economic growth.
“Investors have pushed the gold price sharply higher over the past 10 years with the past five-year rally driven by fears that aggressive central bank quantitative easing would lead to very high inflation,” Societe Generale said. “Professional sentiment, as evidenced by heavy redemptions in ETFs and the increasing willingness of managed money investors to trade from the short side, confirms our view that gold may have had its ‘last hurrah.’”
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