Gold’s Rout Deepens as Investors Reduce Holdings on Recovery

By Glenys Sim and Phoebe Sedgman on April 15, 2013

Gold, which plunged into a bear market last week, extended a rout to the lowest level since April 2011 on expectations that demand for haven assets will contract as the global economy improves. Silver slumped.

Gold for immediate delivery dropped as much as 3.9 percent to $1,425.75 an ounce and was at $1,448.25 at 1 p.m. in Singapore. Prices tumbled 5 percent on April 12, taking losses to more than 20 percent since the record close in September 2011, and meeting the common definition of a bear market.

Bullion has dropped 14 percent in 2013, after rising for 12 years, as data showed that the U.S. recovery was gaining traction, prompting increased speculation that the central bank will rein in its unprecedented stimulus program. Holdings in exchange-traded products contracted at a record pace in the first quarter, and have fallen for the past nine weeks. The turn in the gold cycle is quickening and investors should sell the metal, Goldman Sachs Group Inc. said in an April 10 note.

“The demise of gold is still at an early stage,” Georgette Boele, a commodities strategist at ABN Amro Group NV, wrote in a note today. “Other assets will become increasingly more attractive as the growth outlook improves.”

Gold for June delivery fell as much as 5.3 percent to $1,422.20 on the Comex in New York, and traded at $1,447.40. Futures slumped 4.1 percent on April 12 as Cyprus may sell its gold holdings to cover possible losses from emergency loans.

‘Key Pillars’

“Some of the key pillars of the gold bull market look like they’re suffering fatigue,” Peter Richardson, an analyst at Morgan Stanley, said by phone from Melbourne today. “The gold market’s probably started to price in the prospect that beleaguered members of the euro zone might be forced to sell gold to raise part of the funding, and there are much bigger holders in that category than Cyprus.”

Assets in exchange-traded products backed by gold decreased to 2,406.16 metric tons on April 12, the least since August, according to data compiled by Bloomberg. They shrank 6.9 percent in the first quarter, the biggest reduction since at least 2004.

Gold-related equities dropped. Newcrest Mining Ltd. (NCM), Australia’s biggest producer, lost 8.2 percent to A$17.93 in Sydney, and Zijin Mining Group Co., China’s biggest gold miner by market value, fell 8.8 percent to HK$2.29 in Hong Kong.

“I love the fact that gold is finally breaking down because that will offer an excellent buying opportunity,” Marc Faber, publisher of the Gloom, Boom & Doom report, said on Bloomberg Television’s “Street Smart” on April 12. “The bull market in gold is not completed.”

China’s Growth

Data today showed that gross domestic product in China, the world’s largest gold producer, expanded 7.7 percent in the first quarter from a year earlier, missing the median of analysts’ estimates. The statistics bureau characterized the economy in the first quarter as stable.

Cash silver dropped as much as 6.8 percent to $24.24 an ounce, the lowest level since November 2010, and was at $24.50. Spot platinum fell as much as 2.8 percent to $1,444.50 an ounce, the lowest level since August. Palladium slumped 3.4 percent to $683.20 an ounce, the lowest since Jan. 9.

The U.S. Federal Reserve is buying $85 billion of debt a month and has said further improvement in the labor market is needed to consider reducing its stimulus. Minutes of the policy makers’ March meeting released April 10 showed that several members were in favor of pulling back on the program this year.

U.S. stocks advanced last week, sending the Standard & Poor’s 500 Index to an all-time high, amid optimism that corporate earnings growth will continue. The index has more than doubled from its 12-year low in March 2009, helped by the Fed’s bond purchases and three straight years of profit growth.

Retail Sales

The U.S. economy expanded at a 3 percent annualized rate in the first three months of 2013, and will slow to a 1.5 percent pace in the second quarter, according to the median forecast of economists surveyed by Bloomberg from April 5 to April 9. Still payrolls grew 88,000 in March, the smallest gain in nine months, the Labor Department said on April 5, while data on April 12 showed retail sales dropped 0.4 percent last month.

Goldman cut its three-month gold target to $1,530 from $1,615 and lowered the 12-month forecast to $1,390 from $1,550, analysts Damien Courvalin and Jeffrey Currie said in the April 10 report. While higher inflation may be the catalyst for the next cycle, that’s probably several years away, they wrote.

Gold dropped today even as the Dollar Index (DXY), a gauge against six counterparts, fell as much as 0.3 percent. Bullion typically trades counter to the U.S. currency, which has advanced 3.2 percent this year.

Soros’s View

Gold has ceased to be the haven for investors after it fell when the euro was close to collapse last year, billionaire investor George Soros said in an interview with the South China Morning Post published April 8. Soros cut his stake in the SPDR gold fund by 55 percent in the fourth quarter, a filing showed.

“The investment community has barely begun to liquidate their holdings,” of gold-related assets, said Stewart Richardson, who helps oversee $100 million as partner and chief investment officer at RMG Wealth Management LLP in London.

Rene Hochreiter, chief executive officer of Allan Hochreiter (Pty) Ltd. and the top forecaster in the London Bullion Market Association’s 2012 poll, predicted in January that gold’s bull market was over as the U.S. economy improved.

To contact the reporters for this story: Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net; Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net