Gold’s Role As A Safe Haven Is Over: Societe Generale

Societe Generale’s Cross Asset Research released a Global Research Alert on gold today. In the report, Cross Asset argues that the Fed taper was “the final blow” for gold bulls, and the taper together with looming deflation means there is a strong likelihood of a further decline in gold prices in 2014.

Gold dropped 28% in 2013

Gold finally ended its 12-year bull run in 2013, dropping from close to $1,600 an ounce at the beginning of the year to around $1,200 an ounce currently. That is a painful 28% net drop over the last 12 months. However, the magnitude of the price drop must be tempered by the fact that 2013 was a tough year for commodities in general (with the exception of oil and palladium), and silver dropped an even more precipitous 35%.

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Looming deflation

The Cross Asset analysts point to looming deflation as another key driver in the decline of the price of gold: “But for gold, one of the most negative signals came from the risk of deflation, which is still looming in developed countries (see our November publication on deflation). Both the ECB and the Fed forecast a low level of inflation for 2013 and 2014 (the lowest since 2009). Meanwhile, despite the launch of a new round of QE by the BoJ, Japan’s inflation remains low at around 1%.”

Losing value as a hedging tool

The SG report also highlights the fact that the current deflationary macro environment obviates the traditional relationship between the precious metal and inflation, and in effect makes it almost useless as a hedging tool. “Gold lost its role as a safe haven against systemic risk in 2013. The Italian elections, the Cyprus bail-in and even the U.S. shutdown and debt ceiling failed to drive gold higher.”

Gold to $1,050 by 2016

Societe Generale believes that gold prices are in secular downtrend and is calling for gold prices to drop to $1,050 by 2016. They point to three factors to make their case. “The three negative factors that we had already been concerned about in our January report are still in place: 1) equities still stand at historical lows relative to gold, making the latter less attractive; 2) the U.S. economy is recovering, pushing rates up and offering some returns to investors; 3) inflation is still under control.”