Gold: still more downside

by: Georgette Boele

  • Gold prices received a temporary boost from the Fed’s taper postponement
  • We stick to our view of lower gold prices for 2013-2015…
  • …and present seven reasons why gold prices will decline

How did the Fed’s decision impact precious metal prices? 
Last Wednesday, the US Federal Reserve decided to continue purchasing US Treasury bonds and mortgage linked securities at a rate of $85bn a month. This came as a surprise to financial markets, which rallied higher. Indeed, investors seem to share our view that the Fed’s unexpected decision will support US growth and investor sentiment. Precious metal prices also rallied higher. Gold prices surged from 1,300 USD per ounce to a high just below 1,376, or a rally of 6%. A lower USD and higher inflation expectations drove gold prices higher. Silver prices rallied by almost 10% and platinum and palladium by 3-5%. The day following the decision, though, precious metal prices stabilised. Since last Friday, they have given up most of their gains.

Did the Fed’s decision change the gold outlook?
We present seven reasons why we continue to expect lower gold prices for 2013-2015.


  • In our view, the Fed only delayed its decision to slow down its asset purchases for a few months. We expect the scaling back of stimulus to happen this year at the December meeting. A reduction in monetary stimulus is one reason why we expect higher interest rates for 2013-2014. This shall reduce the attractiveness of gold as a zero-income asset.
  • Inflation pressures in the developed world should remain subdued, lowering demand for gold as an inflation-hedge.
  • We expect the US recovery to accelerate, reducing the attractiveness for gold as a safe-haven asset.
  • A subsequent improvement in investor sentiment shall also reduce demand for gold as safe-haven asset.
  • And a higher USD will automatically make gold less attractive.
  • Investors use every rally in gold prices as an opportunity to sell. The reaction to the rally after the Fed decision wasn’t different.
  • Physical demand from India should be discouraged by the gold import duty increases and other measures that aim to reduce the current account deficit.