Gold loses shine in face of U.S. recovery

Gold bars on display in a shop in Tokyo, Japan

Story highlights

  • Interest in gold has surged in the past ten years
  • But gold prices have already dropped 9 per cent since late February
  • Decreasing interest in gold comes with the US economy showing signs of recovering

Investors are losing their enthusiasm for gold as signs of improvement in the US economy tempt them away from the traditional haven.

Interest in gold has surged in the past ten years, as prices have risen more than sevenfold from just $253 in 2001 to a peak of nearly $2,000 last year. But investors have become more wary about putting fresh money into the metal as they have been at any point during the last decade's rally, according to some bankers.

Gold prices have already dropped 9 per cent since late February, on Thursday hitting a 10-week low of $1,627.68.

"Sentiment towards gold is as low as it has been for many years, possibly since the rally started," said Kamal Naqvi, head of commodity investor sales at Credit Suisse. "For virtually the first time this cycle, buying gold is a contrarian trade."

So far, few traders or investors believe gold's decade-long bull market is over. Nonetheless, a simultaneous fall-off in demand from western investors and Asian consumers has rattled the market.

With the US economy showing signs of recovering and fears about the eurozone sovereign debt crisis easing, investors are putting their money into equities and other assets geared towards economic growth rather than havens such as gold.

The US Mint's sales of American Eagle gold coins, seen as a good indicator of investor sentiment, fell in February and March to their lowest level since mid-2008, down about 70 per cent from last year. Open interest in gold futures on Comex in New York is close to a 2½-year low.

More worryingly, traders say, the physical markets Asia and the Middle East, which have traditionally provided a backstop to gold when prices fall, are also quiet. In India, historically the largest consumer of physical gold, the government last Friday announced it would double taxes on gold imports, triggering outrage among the country's jewellers, who closed their shops this week in protest.

Some senior gold traders and bankers believe prices could fall further to $1,450-$1,520 -- a drop of as much as 24 per cent from last September's record high of $1,920.

"I wouldn't be surprised to see $1,500," said a senior precious metals banker. "Gold doesn't have the same profile it has had for the last two years."

Edel Tully, precious metals strategist at UBS, this week lowered her forecast for gold prices, predicting that the metal would trade as low as $1,550 in the next month. "Investors are not using this [price correction] as an opportunity to buy cheaper gold," she said. "Instead, more are looking at the potential to short it."

Still, many investors and analysts believe that a correction could ultimately turn out to be a buying opportunity, pointing to parallels with early 2011, when some investors including George Soros sold their gold on the back of signs of recovery in the US economy only to see the price rise sharply as economic worries returned.

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