Credit Suisse Goes Bearish On Gold

In a recently-released report, Credit Suisse has predicted an oversupply of gold in the year 2010 based on demand considerations. Opining that 2009's ETF demand was aberrational, the report's author expects 2010 demand to fall to more normal levels. Given the drop in jewelry demand as prices rose, and given the expectation that it'll rise marginally if prices keep falling, there should be a net oversupply of about 420 tons of gold this year. That oversupply will drive gold down to below $1,000/oz.

The Business Insider has picked up on this report [here], but the tip of the hat has to go to Zero Hedge for timeliness. ZH also has reproduced the entire report in Scribd format.


Could it happen? Could a decline of that magnitude visit the gold market, especially given where we're at in the reflation cycle? According to the analytical report, the answer is "yes" because increasing investment demand from all sources will be offset by dis-investment from professionals who see crisis ebbing. As recovery becomes more evident, some money that has been placed in gold will shift to stocks. That's the nub of the Credit Suisse case for oversupply pushing down the gold price. Overall net demand for gold will grow at a lesser (more normal) rate because stocks are now a more competitive alternative.

I don't believe that gold will fall that far myself, but the analyst does have a good point about the recovery trade. During this current bull market, gold's been hammered down a few times: in '03, '06 and '08. [10-year-chart here.] In the first two cases, those pullbacks have been followed by trading ranges that have lasted more or less a year. The only exception to the rule was '08, where a downdraft was followed by two worse ones several months later. After the spring pullback, gold turned in two lower lows in September and November of that year.

But, that was during a year of financial crisis that sent the U.S. dollar soaring and deflationary expectations soaring too. Recovery won't re-create the same panic; only another financial crisis will.

Granted that yesterday's chart patterns show the effect of yesterday's fundamentals, and don't speak to today's or tomorrow's, but they also show how the market behaves. So far, there hasn't been a low that's undercut Dec. 22nd's. And, recovery does not pack a deflationary punch that would send investors scrambling for the U.S. dollar as a safe haven. The greenback may be pushed up by recovery, but there's no solid reason why it should.

From a long-term standpoint, my skepticism about Credit Suisse's bearishness does seems to be little more than a quibble. I should add that the analyst sees the gold price marking time in the next few years at about the $1,000 level.


Update: Also somewhat bearish is geologist and gold-stock market-letter writer Michael S. “Mickey” Fulp:

[S]upply and demand fundamentals do not support the current price. And we’re in a deflationary environment. There is no rampant inflation on the horizon right now. It can be argued that when the quantitative easing is over and the US raises interest rates that we will once again be in an inflationary environment but that doesn’t mean that gold is going to the moon. Gold generally retains its purchasing power and that’s about it.