Gold Is Getting Slammed, Silver Falling Out Of Bed

Gold is having a rough morning.

Right now, the metal is down 2.4%, trading right around $US1335 an ounce.

The metal rose as high as $US1375 this week after the Federal Reserve surprised markets with its decision not to begin tapering the pace of bond purchases it makes under its quantitative easing program.

Now, it looks like it’s headed back down the other way.

Meanwhile, silver is even worse. That metal is down 5.8%, trading around $US22 an ounce.

Yesterday, Société Générale strategists, who have been bearish on gold all year, updated clients on where they think gold is going next given the Fed’s surprise decision:

The gold price rallied hard after the FOMC announcement as short tactical gold positions were squeezed out. It is difficult to say whether there are many more weak hands on the short side yet to get squeezed out but we think that most of the short-covering has probably already been done. If so, gold is unlikely to trade above $US1400 unless investors are willing put on fresh long positions.

But are investors likely to put on fresh long gold positions at current levels as a result of a delay to Fed tapering? We doubt it because the Fed taper delay doesn’t change the fact that most of the gold fundamentals are, in our view, bearish. The Fed taper delay has at most weakened the bearish case somewhat but not to an extent that it is likely to prevent the gold price from trending lower.

The key bearish gold fundamentals remain in place: The US economy is recovering at pace, US real interest rates have risen and are likely to trend higher as the recovery gains strength, inflation is very subdued, Fed tapering is likely to start before year-end ( see FOMC post-mortem: If not now, when?). This combined with the fact that investors remain very long gold via ETFs suggest to us that investors are likely to remain net sellers despite the Fed taper delay. The opportunity cost of holding gold is rising and with global stock markets trending higher, gold seems rather unattractive at present.

In conclusion, we remain firmly bearish gold despite the surprising Fed taper delay. The delay may slow the down-trend somewhat but we keep our gold forecasts unchanged for now. We forecast the gold price to average $US1,225 during Q4 13 and to drop down to about $US1,100 during 2014. We recommend investors to use the recent gold rally as a selling opportunity.

Goldman Sachs analysts, who are also bearish on the metal, say risks are skewed toward the upside for gold prices going into the end of the year.

The chart below shows trading in gold this week.

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