Take latest gold forecast downgrades with a pinch of salt


On Tuesday, Morgan Stanley said in a note that the fundamentals of the bull market for gold appear to be eroding. At this point of time, such view is no surprise to most market players, as a large number of money managers and investment banks made the news during the past few weeks with similar gold price forecast downgrades.

Some of them as CITI predicted the sunset of gold as early as a year ago, while others became more active with the precious metals downgrades during the first quarter of this year. During the last three days, this joint actions of big money managers drove gold and silver prices to serious lows from a short term perspective.

However, some rallies may continue for ten days in a row, while on the other hand, steep corrections can last for two days only. In both cases, such events present opportunities to make or to lose profits. Such opportunities were not plenty on the precious metal market since the beginning of 2013, as gold price was range bound.

Morgan Stanley cut its forecasts for gold prices for 2013 and 2014. This year’s forecast was downgraded by 16% to $1,487 an ounce from the previous outlook. The 2014 gold price projection was reduced by 15% to $1,563 an ounce.

The recent sell-off in the gold market seem more as a panic-driven, stale long liquidation and stop-loss selling. Gold futures plunged by more than $200 an ounce in a two-session rout, though they found some relief on Tuesday when they closed up 1.9% at $1,387.40 an ounce.

Spot gold prices tumbled by more than $140 an ounce, in a few hours on Monday amid a rout in metals markets, while silver fell nearly 12%.

The several factors that drove bull market in gold since 1999 include: the persistent rise in gold-investment demand expressed through physically backed exchange-traded funds; reduced central-bank selling and significant buying from emerging-market central banks; and anemic mine supply growth.

At present, a subsequent erosion of these fundamentals of gold’s rally of the past 12 years has caused significant changes in the long term positions of a large number of investors.

Selling by ETFs is likely the most important single influence, with persistent liquidation by ETFs evident since early February. Speculation of selling by European central banks and nervousness over the possibility that the U.S. Federal Reserve will end its quantitative-easing program earlier than anticipated are also top contributing factors for investors and traders to liquidate positions.

However, most recent data about weaker than expected global economic recovery released by the Chinese government and the International Monetary Fund calmed market players a bit. Some buyers waded into the gold market on Tuesday, driving prices up almost 2% by the close following a two-session loss of more than $200 an ounce.

Elsewhere, in the U.S. market analysts commented the latest data on consumer inflation, showing few price pressures, mean the Federal Reserve is not likely to stop the quantitative easing any time soon. Initially, the authority announced that QE policy will continue until 2015.

It is evident that in the past months many investors are increasingly diversifying their portfolios by placing assets in real estate and equities. However, economic recovery does not happen overnight, but it is a cyclic development that could take even decades to reverse. In addition, traditionally slow for markets summer season comes not long from April. This strong fundamental factors will eventually slow down gold’s slump and investors’ eagerness to get rid of safe haven assets. Silver’s current price is incredibly attractive right now for long position holders.