Gold prices range bound in 2012 despite perfect set up
Gold prices have remained range bound in 2012, despite a steady decline
in US real rates and rise in central bank holdings that would ordinarily be
supportive. To understand this dislocation we expand our modeling of gold
prices to include the impact of the US Federal Reserve easing. We find that
gold prices “look through” easing that does not require Fed balance sheet
expansion –like Operation Twist – increasing instead on announcements of
easing through expansion on the Fed’s balance sheet.
Improving US growth outlook offsets further Fed easing
Our economists forecast that the US economic recovery will slow early in
2013 before reaccelerating in the second half. They also expect additional
expansion of the Fed’s balance sheet. Near term, the combination of more
easing and weaker growth should prove supportive to gold prices. Medium
term however, the gold outlook is caught between the opposing forces of
more Fed easing and a gradual increase in US real rates on better US
economic growth. Our expanded modeling suggests that the improving US
growth outlook will outweigh further Fed balance sheet expansion and that
the cycle in gold prices will likely turn in 2013. Risks to our growth outlook
remain elevated however, especially given the uncertainty around the
fiscal cliff, making calling the peak in gold prices a difficult exercise.
Gold cycle likely to turn in 2013; lowering gold price forecasts
We lower our 3-, 6- and 12-mo gold price forecasts to $1,825/toz, $1,805/toz
and $1,800/toz and introduce a $1,750/toz 2014 forecast. While we see
potential for higher gold prices in early 2013, we see growing downside
risks. As a result, we find that the risk-reward of holding a long gold
position is diminishing and recommend rolling our long Dec-12 COMEX
gold position into a long Apr-13 position and selling a $1,850/toz call to
finance a $1,575/toz put to protect against a decline in gold prices. Since
2009, this strategy achieved a better Sharpe ratio than a long gold position.