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United States gold prices may drop to 1,170 an ounce in next 6-12 months, said Natixis in its “Metals Review Second Half 2013”.

07 Oct 2013

NEW YORK (Commodity Online): United States gold prices may drop to 1,170 an ounce in next 6-12 months, said Natixis in its “Metals Review Second Half 2013”.

According to Natixis, since the beginning of the year, gold prices have dropped by 20%, falling back to 2010 levels. Two separate events in the second quarter of the year triggered significant drops in the price of gold.

--First, in mid-April, the Cypriot government announced that they would sell their 13 tonnes of gold as part of an EU bail-out package.

--Second, in June, the Fed indicated that it would seek to taper QE. Accompanying those two events, sales of gold from physically backed ETPs have added a new source of supply which has clearly contributed to lower prices.

Looking ahead to 2014 and 2015, “we believe that events in the US will have the biggest impact on gold prices. As the economic situation continues to improve, so gold prices are at risk of further declines as interest rates rise and the need for a safe haven dissipates. For the past four years QE has been the biggest force supporting the price of gold. If the start of tapering heralds the beginning of the end for QE, the fear of hyper-inflation and currency debasement should begin to diminish,” they added.

As US yields push higher, so the opportunity cost of holding gold increases, which in turn may encourage investors to prefer equities and higher yielding assets; as the price of gold has dropped by over 20% this year, the Dow Jones has risen by 17% since the beginning of the year (the quickest pace since the financial crisis), the firm continued.

Alongside tapering, “we could see further outflows from ETPs which would place additional downward pressure on the price of gold. We do not expect to see a repeat of the rapid outflows that occurred during the first half of the year, but with 1,950 tonnes of gold still held by physicallybacked ETPs, there remains substantial scope for further divestment. Such gold outflows would lead to an increase in the supply of the metal at the expense of what has been a substantial source of demand in recent years,” Natixis noted.

“Under this base-case scenario, we could see gold prices dropping to lows of around $1,170/oz over the coming 6-12 months. This floor in prices would be supported by the closure of some higher cost mines as well as the ongoing cost push inflation being experienced by gold mining companies around the world,” London based firm added.

From this base, we would therefore expect the price of gold to begin rising again, in line with the rising costs of production, giving us an average price of around $1,250/oz in 2015, close to our estimated breakeven point for gold mining companies in that year,” Natixis concluded.

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