Gold prices will bottom in 2014 before returning to a record within five years as weaker equities spur demand for a haven and physical buying from Asia strengthens, according to asset manager Pecora Capital LLC.
Bullion may drop to about $1,160 an ounce this year as the dollar advances as much as 5 percent, Boca Raton, Florida-based Pecora said. U.S. stocks that reached an all-time high last month are overvalued and will probably retreat when the Federal Reserve ends stimulus. In that scenario, gold could initially slide as money flows toward cash investments, before rebounding, it said.
The metal retreated 33 percent since reaching a record $1,921.17 in September 2011. While Fed Chair Janet Yellen has said that the central bank’s debt-buying program may end this year with interest rates starting to rise in 2015, economists surveyed by Bloomberg estimate the U.S. economy will grow 2.7 percent this year compared with as much as 3.8 percent in 2004.
“The equity market expansion is purely a function of monetary policy,” said Aaron Smith, Pecora’s managing director and co-founder. “Growth is not inspiring, valuations are lofty. When there’s a stop or contraction to the Fed’s balance sheet, then you’re going to see more than a correction in equities. There’ll be a knee-jerk reaction where very temporarily gold prices will drop and then they’ll outperform.”
Gold gained 7 percent since the end of December to $1,285.26 in London, according to Bloomberg generic pricing. The metal slumped 28 percent last year, the most since 1981, and Smith sees value in the commodity below $1,300. Prices reached an almost three-year low of $1,180.57 in June.
The Standard & Poor’s 500 Index of equities gained 1.3 percent since the end of December, after climbing 30 percent last year. It advanced the past five quarters in the longest run of gains since 2007. The Bloomberg Dollar Spot Index, a gauge against 10 major currencies, rose 11 percent since July 2011.
The biggest factor affecting gold this year will be the U.S. dollar, Smith said by phone yesterday. “The opportunity to buy gold down to $1,160 for me is a gift,” and the cost of mine production at about $1,000 an ounce “is your floor,” he said.
Bullion rose 70 percent from December 2008 to June 2011 as the U.S. central bank pumped more than $2 trillion into the financial system and cut interest rates to a record to boost the economy. The S&P gauge of stocks rose 46 percent in the period and advanced another 42 percent since then.
Gold’s first annual decline in 13 years spurred more physical demand from Asia, with China and India accounting for about 53 percent of global consumer demand last year, according to the London-based World Gold Council.
“I think the demographics are going to heat up again for Asia in terms of purchasing gold,” said Smith, who added that Pecora mainly buys physical bullion and gold exchange-traded products. “Gold is really very attractive with respect to yen from a medium- to long-term perspective” as the Bank of Japan continues unprecedented easing begun last April, he said.
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