Gold lower on SocGen bearish expectations

French bank Societe Generale has published a strictly negative outlook for bullion, stating that gold is still in a "bubble territory."

Gold lower on SocGen bearish expectations

by Marek Bocanek
WBP Online

London/New York - The yellow metal dropped by more than 1.5% on Tuesday, following confirmation of overvaluation. Societe Generale (SocGen) analysts published a report called "The End of the Gold Era," with the lowest price target of $1,375 per troy ounce at the end of the year 2013.

Bullion hit $1,604 on Tuesday after negative ISM Manufacturing PMI data on Monday from the US and subsequently fell by more than 2% below $1,570 following its negative outlook. On Wednesday gold futures hit their 3-week low at $1,561 per ounce.

Increased calm on the markets after the Cyprus crisis, along with improved conditions in the US economy and rising equity markets have led to weaker interest in gold trading with visible consequences on its prices.

"Investors have pushed the gold price sharply higher over the past 10 years with the past five-year rally driven by fears that aggressive central bank QE would lead to very high inflation. But inflation has so far stayed low (US inflation has been trending lower since late 2011) and now we are beginning to see: 1) the economic conditions that would justify an end to the Fed’s QE; 2) fiscal stabilization that has passed its inflection point; and 3) a US dollar that has begun trending higher. It seems unlikely that investors would want to add much to their long gold positions in this context," Sebastien Galy, senior FX strategist at SocGen stated.

Gold ETFs confirmed such trend this year. "Since the beginning of January of this year, gold ETFs have dumped roughly 140 tonnes of gold and February witnessed the largest monthly outflow on record," SocGen informed.

On the other hand, despite mainly positive quotes from European officials, the Eurozone is struggling with its need for structural reforms to beat the ongoing sovereign debt crisis. Any further problems could boost investment into safe-haven instruments, such as bullion.

Silver joined the bearish club testing its support of $27.0 per ounce, reacting the same way as bullion. Copper was traded near its 7-month low, hitting $3.341 a pound following disappointing US and Chinese manufacturing data on Monday and stayed at low levels waiting for fresh data. On the Comex division of the New York Mercantile Exchange, copper futures were traded at $3.365 a pound on Wednesday.

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