Precious Metals "Back To Status Quo" After Fed Surprise, Say Analysts

BOTH the price of gold and silver recovered early losses Monday morning in London, regaining a 1% and 2% drop respectively as world stock markets slipped with commodities.

German Bunds held flat, but the Euro currency dropped half-a-cent to a 3-session low after Angela Merkel was returned as German chancellor in national elections.

"Fed fever has broken," said one floor trader quoted by CNBC on Friday, with markets performing what another broker calls "an incredible about-face" at the end of last week to erase Wednesday's sharp gains after the US central bank held its QE money printing program unchanged.

Longer-term – and blaming late-August's news from Syria for gold's 9-week rise starting end-June – "We expect market cheer will be capped and a return to status quo," says Citigroup in a widely-cited report.

"The postponement of the [QE] tapering decision by the FOMC represents only a short-term reprieve for gold," Citi's analysts go on.

"Does this mean the end of the downtrend? In our view, the fundamental and clear answer is no."

"While any further postponement," agree Morgan Stanley analysts, "would likely continue to benefit gold prices in the near term, we still think it is just delaying the inevitable.

"The longer-term narrative for gold remains in place – waning investor appetite for a risk and inflation hedge, challenged physical demand and a rising US Dollar."

Morgan Stanley now sees gold trading in a range from $1200 to $1350 to year-end, before falling further in 2014.

Citi sees the gold price averaging $1250 per ounce across full-year 2013. It has so far averaged $1460.

The bank's analysts meantime forecast an 11% rise in the S&P500 index by New Year.

Speculative traders using futures and options cut their bullish bets and grew their bearish bets on gold last week ahead of the US Fed's "no tapering" surprise.

Latest data from US regulator the CFTC put the "net long" position of these non-industry traders equal to 292 tonnes last Tuesday – barely 51% of the last 5-year average.

So-called "small speculators" – meaning private individuals and other 'unreportable' positions – meantime cut their net long on gold futures and options to the equivalent of just 25 tonnes.

That was barely one fifth of their 5-year average.

"The Fed's decision to continue with an ultra-accommodative monetary policy arguably paves the way for a rebuilding of long positions after the recent short covering," says Mitsubishi analyst Jonathan Butler.

Short-term, he adds, "Trading should be choppy as investor sentiment alternates between tapering (negative for gold) and the impending US debt ceiling (positive for gold)."

Moreover, the next week brings the end of September and so the end of the third calendar quarter. So "few people will want to establish fresh longs right now," reckon brokers Marex in a note.

Adrian Ash

(c) BullionVault 2013

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