Gold: Short-term fair value is persistently bearish

UNITED STATES December 02 2013 3:24 PM
 

NEW YORK (Scrap Register): Given recent development in key explanatory variables, Barclays gold fair-value model suggests that prices are marginally overvalued in November and that the average price will approach $1,243/oz in December 2013. The short-term fair value for gold is persistently bearish, said Barclays capital in a research note.

 

After gaining temporarily in late October, gold prices continued to slide in November, tumbling below $1,250/oz mid-month. So is there any upside to gold prices in the near term? Without any turnaround in our key explanatory variables, such as the dollar index, real yields, equity variables and gold-backed ETP holdings, our gold fair-value model suggests prices will continue to face downside pressure into 2014.

 

The dollar index, one of the key variables in our gold model, has strengthened gradually in November. Our FX strategists now project the dollar index strengthening gradually in the next 12 months, appreciating by about 1% in one month’s time. We therefore expect this negative dollar effect to continue to feed through to gold prices in the medium term, Barclays continued. 

 

Furthermore, although our Treasury and inflation-linked strategists have maintained their US 10y real yield forecasts, estimating 50bp for Q1 14, the average US 10y real yield MTD has increased to 51bp as of 26 November from an average of 40bp in October, the biggest increase since July 2013. This rise has had a further negative impact on modelled gold prices in the very near term, they added.

 

Our price momentum variable, a key measure of the extent to which trading trends persist each month, has dropped by about 31% m/m in November. The dip reflects strongly negative market sentiment towards gold and investors’ herding behaviour, which further emphasises the gloomy market outlook for near-term gold prices, the firm noted. 

 

The pace of ETP outflows has been rising again in November, dropping by 38.4 tonnes MTD as of 26 November. Given that gold prices have been consistently around $1,250/oz recently, a large number of shares have become cash negative. We anticipate ETP outflows to continue until the end of this year and could potentially speed up. 

 

Meanwhile, European equity has retained its strength. Our equity analysts expect the Euro Stoxx 50 to appreciate slowly by the end of 2013, while emerging market performance continues to differentiate among regions. MSCI EM equity has weakened by nearly 3% MTD, they continued. 

 

However, our equity analysts expect the recent equity outflows to reverse, as the PMI upswing supports earnings revisions. This should boost EM economies’ underlying wealth and therefore demand for gold in 2014, considering that sentiment in gold buying in China and India, the two biggest gold buyers, has failed to gain momentum in Q4, the firm noted.

 

The above significant developments have outweighed other positive effects on modelled prices, such as weaker US presidential approval ratings and the University of Michigan Consumer Confidence Sentiment Index. 

 

Our model finds that the average MTD gold price is marginally overvalued in November by about $21/oz, suggesting that recent low prices are no surprise. It forecasts the average price approaching $1,243/oz for December 2013, suggesting gold is likely to be mired in rangebound trading in the near term, Barclays concluded.