Gold’s slump “has been faster than we expected,” Goldman analysts led by Jeffrey Currie wrote in a May 14 report. A further drop in ETP holdings would “continue to precipitate this decline,” said the analysts, who forecast prices at $1,390 in 12 months. The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.
Physical buying will help to support prices, said Paul Dietrich, the chief executive officer of Middleburg, Virginia- based Fairfax Global Markets, which oversees about $120 million.
Gold premiums in India, the world’s biggest buyer, more than doubled to $40 an ounce May 15 from $17 to $18 a day earlier, according to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. China’s bullion demand jumped to a record 294.3 tons in the first quarter, the World Gold Council said in a report May 16.
Prices surged 53% since the end of 2008 as central banks printed money on an unprecedented scale to boost growth. The Federal Reserve is buying $85 billion of assets a month to stimulate the world’s biggest economy, while Japan is making monthly bond purchases of more than 7 trillion yen ($67.8 billion).
“The case for gold is still there,” Dietrich said. “All the central banks are joining in a massive printing of money. Physical demand may be helping provide a floor on prices, and while there’s not a lot of downside risk right now to gold, there is a lot of upside potential.”
Bullion fell in six of the past seven months. The S&P 500 Index of equities reached a record May 17 as the dollar climbed to the highest since July 2010 against six major currencies. The U.S. consumer-price index fell for a second month in April, government data showed May 16, and expectations for cost increases, as measured by the break-even rate for 10-year Treasury Inflation Protected Securities, reached the lowest since August the next day.
Money managers withdrew $883 million from gold funds in the week ended May 15, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $1.15 billion, according to EPFR.
Raw materials are returning to a “normal state” from a “super cycle” for prices that saw “abnormal strength” in returns, Goldman said in the May 14 report. Returns for commodities as gauged by the S&P GSCI Enhanced Index will be 1.6% over 12 months. That’s down from an April 23 forecast of 2.5%.