The gold price 'collapse' is one of the most notable investment trends of 2013 after the metal's value fell 27%, the largest annual decline since 1981, and short positions rose by 71%, says Bank of America Merrill Lynch.
“Our interpretation is that the gold price signals ‘regime change’ in financial markets, specifically a secular low in interest rates, a normalisation of asset allocation and, in 2014, the beginning of a vigorous bull market in the US dollar,” the bank says in an investment strategy update.
A long gold position would be a contrarian trade next year, but the bank says for the trade to generate big returns, the base case of higher growth, higher rates and a higher US dollar would need to be nullified.
This could happen either through a resurgence of inflation and/or growth disappointing sufficiently to provoke a much weaker dollar and a fourth round of quantitative easing.
Global stocks have crushed returns from bonds and commodities this year.
Commodity prices have been declining for three consecutive years and have been inversely correlated with the dollar, which rose by 5% this year. While oil has traded higher, industrial metal prices suffered a 16% decline.
The bank says that “the ‘thundering herd’ into equities this year have been spurred by unprecedented central bank liquidity rather than strong economic activity”.
The World Gold Council, an advocate for gold, says the gold market remains “resilient”.
In its latest Gold Demand Trends report, the council says the continued growth in consumer demand across the globe and the strength of Asian gold demand overall reinforces the patterns first seen at the beginning of 2013. This, the council says, is “clear evidence of the self-balancing nature of the global market”.
Worldwide, the demand for gold was 869 tonnes in the quarter. This is 21% lower than over the same time last year. Gold-backed exchange-traded funds (ETFs) saw net outflows of 119 tonnes this quarter, compared to 402 tonnes in the previous quarter. In India, the government invented in the gold market and reduced demand by 7 tonnes.
“Taking the year as a whole so far, the jewellery, bar and coin sectors are showing year-to-date increases, while technology demand remains robust,” the report says. “ETF investment demand is the notable exception, having weakened this year.”
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