Why buy gold baffles investors as top forecaster sees more pain

[LONDON] Why buy gold? That's a question that's confounding some traders.

The eight-day rout that's sent gold to a five-year low has some forecasters expecting more losses. Oversea-Chinese Banking Corp's Barnabas Gan, the most accurate forecaster of precious metals in rankings compiled by Bloomberg, predicts gold will reach US$1,050 an ounce by December, a 5.2 per cent drop from current levels.

"I have to think really hard at the moment to come up with good reasons why anyone would want to invest in gold," Gerhard Schubert, founder of Schubert Commodities Consultancy DMCC, said from Dubai on Monday.

Investors are bailing on gold as the list of reasons to be bearish grows longer. China didn't buy as much bullion as analysts expected, the Federal Reserve may raise interest rates this year and investors see less need for a safe haven as Greece works to stay in the euro. About US$2.7 billion was erased from the value of exchange-traded products tracking precious metals last week, the most since March.

Gold futures for August delivery lost 2.1 per cent to US$1,107.90 an ounce as of 1:03 pm in New York, set for the lowest close since 2010. Prices dropped 6.4 per cent this year.

Money managers are holding the smallest net-bullish bet on gold since the US government data begins in 2006. The net-long position tumbled 39 percent to 4,633 futures and options in the week ended July 14, US Commodity Futures Trading Commission data released Friday show.

The decline led some forecasters to consider cutting year- end estimates. ABN Amro Bank NV's Georgette Boele and Robin Bhar of Societe Generale AG say bullion will approach US$1,000 by December, almost 10 per cent below today's price.

"Gold is navigating very dangerous waters," Bart Melek, the head of commodity strategy at TD Securities in Toronto, said by phone. "We cannot ignore the recent price action and we will relook at our forecasts." Mining stocks are also getting hit. AngloGold Ashanti Ltd sank to a record low in Johannesburg, dropped to the lowest since 1990.

Some analysts are holding onto bullish views. Thorsten Proettel, a commodities analyst at Landesbank Baden- Wuerttemberg, said gold will eventually rise because Europe's political problems are far from over. Still, his forecast for gold to end the year a US$1,300 is unrealistic, he said by phone from Stuttgart, Germany.

The most likely path for gold is lower, according to Bhar of Societe Generale.

"If anyone can show me the bullish case for gold, I'd like to see it," Mr Bhar said by phone. "I doubt this is the final nail in gold's coffin. I think we can add a few more."

BLOOMBERG