Why Gold Price Will Plunge

Why Gold Price Will Plunge To $800 Per Ounce

By CommodityOnline | 11 February 2010

LONDON (Commodity Online): In the last few months, we have been reading predictions and forecasts from bullion analysts who insisted and argued that gold price is booming to touch $2,000, $3,000, $5,000, $10,000 per ounce in the coming years. These forecasts have caught people's attention who have been pouring money into gold and other precious metals all these months. But after the big surge of gold price to $1,227 per ounce some two months back, the yellow metal has been climbing down the ladder of speculation.

Despite speculators going on the 'boom-in-gold-price predictions', the yellow metal price has been sinking in the last two months. "If the gold price fall continues this way, it is certain to touch down to $1,000 per ounce or below this level in the next one month," says bullion analyst Mark Robinson. Robinson, who is not a great bull on gold, says even if gold price falls to $900 or $800 per ounce, people should not complain. "For those who have invested in gold some years back, even $900 or $800 per ounce is a great price tag. So, there is no room for complaints even if gold price falls to realistic levels," he said.

Robinson, a keen bullion watcher focusing on China, says that the Chinese government wants gold price to plunge to $800 per ounce level. "China's biggest ambition these days is to build up gold reserves. For this, the best thing that China wants is a big fall in gold price so that it can buy more gold from IMF, gold miners and from the physical bullion market," argues Robinson. It is not just Robinson who is a bear in gold price forecast. On Monday, a senior analyst with Citigroup came out with purely bearish prediction on gold. Citigroup bullion analyst Alan Heap said that gold prices could sink to $820 an ounce by 2014.

Here is that interesting article that TheStreet.com published on the bearish prediction on gold:

"NEW YORK (TheStreet)— gold prices could sink to $820 an ounce by 2014, in the absence of inflation or strong demand from China, says a Citigroup analyst. Alan Heap, an analyst at Citi Investment Research, adds a bearish voice to a crowded debate over where the precious metal is headed. Billionaire investor James Rogers and perma-bear David Tice say gold will hit $2,500. James Turk , Author of GoldMoney, predicts $8,000, while author Mike Maloney is betting on $15,000.

Over the last decade, gold prices have soared from $250 an ounce to an all-time high of $1,227 an ounce, with many analysts believing that gold is in a continued bull market despite short-term pullbacks. Heap broke with this bull view by saying in a research analysis, "Gold: Paper Problems," that prices will sink to $820 by June of 2014 and head lower long term to $700 an ounce. As global economies print more money and lower interest rates to survive financial crises, gold becomes popular to own. As paper money loses value, investors turn to gold as an alternative safe haven asset.

As gold prices hit a record high of $1,227 an ounce, the U.S. dollar started to move towards its all-time low of $71.40. As the dollar loses value, commodities become cheaper to buy in other currencies. Many analysts expect low interest rates, President Obama's $3.8 trillion budget plan, a raised deficit ceiling and money printing to pressure the dollar and buoy gold prices.

Over the last 10 years, investors have been diversifying into gold more than any other asset class. You no longer have to be a doom and gloom analyst or store gold bars in a bank in order to own the precious metal. Average institutional investors and world central banks have been increasing their gold holdings supporting high prices. Helping investors buy gold is the emergence of gold ETFs. There are now three physically backed ETFs available SPDR Gold Shares(GLD Quote), iShares Comex Gold(IAU Quote) and ETFS Gold Trust(SGOL Quote).

Central banks have become one of the biggest buyers of gold. Countries increase their gold reserves on a percentage basis, usually irrespective of the spot price. In the past year, countries like China, India and Russia have transitioned from being net sellers of gold to net buyers. Portugal holds 90% of its reserves in gold, while the U.S. has 70%. China currently only holds 1,054 tons of its reserves in gold, which is less than 2%.

The biggest threat to rising gold prices is a substantial decrease in long positions in paper markets, Heap writes in his report. "Positions held by money managers and broader non-commercial positions have fallen since November 2009 when the USD strengthened. Non-commercial net long positions are at 5X the average levels seen over the last 17 years."

The Euro reached a seven-month low against the U.S. dollar Friday, as sovereign debt fears in Spain, Portugal and Greece continued to devalue the currency. The dollar is playing the role of 'safe haven' asset for investors jolted by global economic recovery fears lead them out of riskier commodities. There is also an expectation that the Federal Reserve might raise its key interest rate target sooner than expected, which would also support the currency.

The most popular physically backed ETF SPDR Gold Shares(GLD) has seen a decline in tonnage since the beginning of 2010 from 1,128.74 to 1,104.54. Heap noted that ETF holdings are high, but stable. As long as worries over a global banking crisis subside, holdings should remain flat.

A big driver for gold prices in 2009 was pent up demand from China. The country has recently increased its gold reserves to 1,054 tons from 600 tons and is expected to continue diversifying. However, recently the Chinese government ordered banks to increase their reserve ratio by 50 basis points and has encouraged them to restrict lending. China is targeting an 8% growth rate for 2010 instead of the 11% analysts had anticipated.

China's emerging middle class has also unleashed significant gold buying in the physical market. According to the Citi report, from September 2008 to September 2009, China retail demand grew 20 tons out of 260 tons globally. There are worries that the country's $585 billion stimulus program is slowing down, which would curb gold demand from retail investors as well as central banks.

Gold is typically seen as a hedge against inflation as investors buy the precious metal as an alternative asset. But Heap argues that it's not actual inflation that correlates to gold prices, but inflationary expectations. According to the figure above in 2009, the U.S. Consumer Price Index dipped into negative territory, which means no inflation at all. However, gold prices kept rising. Heap thinks that inflationary expectations would have to skyrocket to boost gold; "just a pick-up in inflation wouldn't be the big mover in prices many analysts anticipate."