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The pillars of the bull market for gold looks to be collapsing, Morgan Stanley said in a note Tuesday as it cut its prediction for gold prices for this year and next.
The 2013 forecast was downturned by 16% to $1,487 an ounce from its previous view, and the 2014 projection was decreased by 15% to $1,563 an ounce.
The sell-off in the gold market “has all the hallmarks of panic-driven, stale long liquidation, stop-loss and capitulation selling in the face of a concerted short sale” that began in the New York trading session Friday, Morgan Stanley analyst Peter Richardson wrote in a report.
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.
The origins of the “short-sale assault” can be traced back to the 10% reduction of margins for gold futures contracts implemented in November by metals exchange operator CME Group Inc., said Richardson.
Previously, Morgan Stanley had named several factors driving bull market in gold since 1999, which Richardson cited as: the persistent rise in gold-investment demand expressed through physically backed exchange-traded funds; a “controlled environment” of central-bank selling and the emergence of significant buying from emerging-market central banks; the unwinding of the global gold hedge book, i.e. gold buy-backs; and anemic mine supply growth.
However, he said the subsequent erosion of these major pillars of gold’s advance has “provided fertile ground for such a successful and attractively priced assault on the long skew to investor positioning in the market.”
Selling by ETFs is likely the most important single influence, with persistent liquidation by ETFs evident since early February, Richardson said. 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, he said.
