HardAssetsInvestor

Written by Sumit Roy  |

January 08, 2013

Gold Headed For First Decline In 13 Years In 2013, But Long-Term Bullish Thesis Remain

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We offer our latest analysis on the precious metals market.

After plunging in December, gold and silver have stabilized near the $1650 and $30 levels, respectively, in recent sessions. Traders may be looking ahead to the approaching “debt ceiling” debate in the United States, which may be as contentious as—if not more than—the just-resolved “fiscal cliff” debate.

In addition to the issue of the debt ceiling, Congress and President Obama must deal with the “sequester”—more than $100 billion worth of automatic spending cuts that were delayed by two months thanks to the fiscal cliff deal.

If politicians can’t reach a compromise, the economy will take a hit and the Federal Reserve is likely to maintain its ultra-loose monetary policies for longer than expected, supporting gold and silver.

However, that worst-case scenario is not the consensus expectation. Indeed, most anticipate that the U.S. economy will perform robustly this year in spite of the political head winds from Washington. Most anticipate that politicians will grudgingly reach a deal, and that the recent acceleration in economic growth will continue unabated.

In fact, that is what Fed officials believe as well. Last week, according to the Fed’s minutes of its December meeting, we learned that most committee members forecast that the economy will be strong enough to support an end to the central bank’s quantitative easing (QE) programs sometime this year:

“… a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013 … few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases … several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013….”

If the Fed ends QE this year, that will certainly be a negative for gold and silver. However, by no means will that mark the end of the bull market in the metals. After all, there were no ongoing QE programs between November 2010 and June 2011, yet gold rallied in the period.

Still, the end of QE will leave traders searching for new catalysts to drive prices. And after 12-straight years of gains, the bull market in gold may be in need of a rest. That’s why we are forecasting a down year for prices, with an initial target of $1550 for gold and $26 for silver.

Longer term, the three legs of the bullish thesis—rapid demand growth from emerging markets such as China and India; sovereign debt concerns across the developed world; and the increasing awareness of gold and silver as monetary alternatives (legitimized by central bank buying)—will keep prices supported.

Bottom Line: Gold may decline to $1550 this year, marking the first annual decline in 13 years. Our target for silver is $26. Our longer-term bullish thesis remains unchanged.