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Investment Ideas Gold heading for a harsh fall later this year: Société Générale

Gold bars.

LISI NIESNER/REUTERS

Société Générale looks for gold to pull back below $1,400 (U.S.) an ounce by the end of the year.

The bank, in a new research report, said a recovery in the U.S. economy will mean that quantitative easing is likely to be scaled back in the fourth quarter, with bond yields rising ahead of this. The firm looks for 10-year yields to hit 2.75 per cent by year-end. That should undermine the performance of gold, and to some extent, silver.

Société Générale said inflation has remained low at a time when "we are beginning to see economic conditions that would justify an end" to the Federal Reserve's quantitative easing, and the U.S. dollar has started trending higher.

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"It seems unlikely that investors would want to add to their long gold positions in this context," the firm said. "If so, the gold price would trend lower at pace as the physical gold market is seriously oversupplied without continued large-scale investor buying. We forecast the gold price to have dropped to below $1,400 by year-end and for it to continue to trend lower next year."

Société Générale forecast average full-year 2013 gold prices of $1,500. The bank listed a first-quarter forecast of $1,625, then $1,550 and $1,450 the next two quarters before $1,375 in the fourth. Silver was forecast at $30 in the first quarter and $24 in the fourth.

The bank said it does look for an upward move, however, before weakness sets in.

"The economic and financial background certainly suggests that there will be fresh gold purchases this year as some investors consider the longer-term ramifications of precarious national fiscal positions," Société Générale said. "Equally, the improvement in the physical market in March is likely to help to support prices and ultimately trigger some short covering. It is also conceivable that the majority of loose-handed holders have now made their exit from the market, thereby reducing the potential for pent-up profit-taking."

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