Gold Will Continue To Go Lower, Unless Investment Demand Returns

I have never really bought the argument about the dollar and gold (GLD). Yes, many years ago there was a relationship between gold and the dollar, but that was because the world monetary system was different. Today, the amount of money in circulation has nothing to do with gold. Look at Japan — it has been printing overtime for many years now, as well as all of Asia. Why does gold have to be a function of U.S. dollar printing, and not a function of international money printing? Funny enough, gold bulls never really mention money printing in the rest of the world.

Either way, the reason why gold and silver (SLV) will go up or down is demand. Is does not matter where this demand is coming from. Demand is demand, and at the margin increased demand will raise prices. Demand destruction, on the other hand, will take prices down.

Click to enlarge image.

The chart above comes from the World Gold Council, the officially lobbying group for all things gold. As its figures show, demand for gold was down across the board in Q4 2012 year over year, with the exception of jewelry, which posted a 12% gain. However, demand from technology, investment, and even official sector purchases were down.

In fact, if we look at Q1 2013, investment demand was a whopping 50% lower vs. Q4 2012. Something else to keep in mind is this: Investment demand makes up 21% of total demand. At the margin, if you strip out 50% of investment demand, that comes out to a 10% total loss in demand for gold. While this is demand that could be made up somewhere else, the truth of the matter is that so far it hasn’t. As far as when investment demand will come back, for the time being this does not seem to be in the cards.

In a recent poll taken by Credit Suisse, over half the 185 commodity investors that participated in the poll believe that gold will be lower than $1,400 an ounce by the end of 2013. Societe Generale believes that gold holdings through exchange-traded products will probably decrease by another 285 metric tons in 2013. Societe Generale believes that gold prices will average $1,200 an ounce in Q4 2013. The firm had previously forecast a drop to $1,375 by the end of the year.

I don’t know when investment demand for gold and silver will come back. But unless it comes back, prices at the margin will continue to fall. For how long and were prices will bottom is anyone’s guess, but I think the $1,200 mark that Societe Generale mentioned is as good a guess as any. Finally, jewelry purchases from India (or China for that matter) are not enough to offset current investment outflows, in order for demand to increase enough for gold and silver prices to start rising again. That will only happen when investment demand and investment demand alone for gold and silver revives.


Paradigm Shift Will Cause Gold

The commodities analysts at Societe Generale have been among the most bearish on Wall Street.

Earlier this year, the declared the “End of The Gold Era” and argued that prices would fall to $1,375 by the end of this year.

But after talking to a bunch of clients since that initial report, the analysts have only gotten more bearish.

“We believe that the dramatic gold sell-off in April, combined with the prospect of the Fed starting to taper its QE programme before year-end, has resulted in a paradigm shift in many investors’ attitude towards gold,” said SocGen’s team led by Michael Haigh, Jesper Dannesboe, and Robin Bhar.

“This is likely to result in continued large-scale gold ETF selling this year and next,” they added. “ETF gold selling has averaged about 100 tonnes per month since the April sell-off. We expect continued ETF selling to exceed higher demand for jewellery/bars and coins. Therefore, we have revised lower our Q4 13 gold forecast to $1,200/oz.”

Gold ETFs: Six Straight Months of Outflows

After consecutive years of higher gold prices, traders have finally begun letting go of the precious metal, with gold exchange traded funds experiencing their sixth straight month of outflows.

The SPDR Gold Trust (NYSEArca: GLD), the largest gold-related ETF, lost $2.9 billion in assets over May, according to IndexUniverse. Meanwhile, the ETFS Physical Swiss Gold (NYSEArca: SGOL) shrunk by $89.4 million and the iShares Gold Trust (NYSEArca: IAU) saw $371.5 million in outflows.

Overall, gold exchange traded products saw $5.7 billion in outflows last month, bringing year-to-date redemptions to $23.9 billion, according to BlackRock research note. Total gold ETP assets now sit at $96.2 billion, or 31.9% lower from the $141.2 billion at the end of 2012.

BlackRock analysts attribute the rapidly declining interest in gold to the growing speculation that the Federal Reserve’s monetary easing policies could end in the near term as the economy improves, which would force up interest rates. Consequently, a stronger U.S. dollar, greater demand for equities and shift away from traditional “safe haven” assets.

Gold futures were trading around $1,397 per ounce Tuesday.

Gold prices dipped below $1,400 Tuesday on concerns that India, the largest consumer of gold, would restrict imports, reports Lara Denina for Reuters.

“The news that the RBI will curb imports of gold by agencies has weighed prices down today as it is a wider restriction and could imply lower imports of gold into the country,” Societe Generale analyst Robin Bhar said in the article.

Despite recent correction in gold, investors should not shy away from the asset class altogether.

“While gold has historically been seen as a potential cash alternative in periods of economic uncertainty and a hedge against inflation concerns or a weakening dollar, many invest in gold as a long-term holding due to its diversifying properties,” BlackRock said. “Gold has historically shown little to no correlation with other major asset classes, including commodities, and gold is a beneficiary of negative real interest rates which have persisted for some time in many developed economies.”

For more information on gold, visit our gold category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own GLD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.