Societe Generale SA’s Michael Haigh correctly predicted this year’s rout in gold by using a math problem to measure a feeling. His arithmetic says there’s worse to come.
Haigh’s algorithm, called the Principle Component Analysis model, uses 27 indicators ranging from the value of the Indian rupee to the yield on 10-year German bunds to determine what percentage of a commodity’s price movement is influenced by supply and demand, and how much is related to macroeconomic concerns, liquidity and fluctuations in the dollar.
Three months ago his formula showed investors were becoming more bullish on economic growth while gold’s outlook was bearish. On April 2, Haigh and the 10 analysts he leads issued a report laying out the case for a crash. Bullion tumbled into a bear market 10 days later, with its biggest two-day retreat in more than 30 years. Societe Generale predicts a fourth-quarter average of $1,200 an ounce, or 7.3% less than now.
“The investors in gold are treating it differently than they were before by ignoring these bigger outside factors,” said Haigh, 43, the bank’s global head of commodities research in New York. “They are basically putting to the sidelines the macro outlook and sentiment outlook, and just dumping gold. Investors are just getting out.”
Assets in exchange-traded products backed by gold slumped by 174 metric tons in April, valued at $8.3 billion at the time and the biggest drop on record. Holdings are now at a two-year low as sales extend into a sixth month, the longest losing streak in data compiled by Bloomberg and a sign of how some investors have lost faith in bullion as a store of wealth.
Gold tumbled today to the lowest since September 2010 after U.S. Federal Reserve Chairman Ben S. Bernanke said asset purchases may be reduced later this year. The price is down 23% this year to $1,293.84, on track for its first annual loss since 2000. Bullion’s 12-year run of gains was the longest since at least 1920, according to data compiled by Bloomberg. It peaked at $1,921.15 in September 2011, still less than prices reached in 1980 when adjusted for inflation. Its 1980 record of $850 is equal to $2,409 today, data compiled by the Federal Reserve Bank of Minneapolis show.
U.S. inflation is below the Fed’s target of 2%, reducing demand for gold as a hedge, while buyers sold haven assets including precious metals in favor of equities. The Standard & Poor’s 500 Index reached a record last month and more than $3.4 trillion was added to the value of global stocks since the start of the year. Global bond markets posted their biggest monthly loss in nine years in May.