Dominic Schnider, Analyst UBS AG: Gold – don't catch a falling knife

Gold – don't catch a falling knife
Having recently broken its three-year uptrend, the gold price should
remain under pressure and has room to weaken further, in our
view. A deteriorating technical picture and a stronger USD are
fueling the downside momentum. Futures positions held by
financial investors are likely to be unwound with further USD
strength. Up to 7 million ounces of net long positions are at risk, in
our view. Gold ETF holdings which have been stable so far could
also come under pressure. Should both ETF and futures markets
start to reduce their gold exposure, the current downtrend would
persist or even gain strength.
To balance the oversupplied market, financial demand needs to rise
by around 20% this year. We think this is highly unlikely despite the
economic and political uncertainties in Europe. The outlook for key
central banks to balloon their balance sheets remains rather small,
and a weak EUR is no help either. Gold-buying by central banks is
also unlikely to be meaningful enough to make up for the shortfall
in investment demand. In our view, the only demand factor that
could help is jewelry consumption, but for that to happen, gold
prices need to fall much further. Thus, we target USD 1,520/oz in
the coming days. This should not be seen as a hard floor as
prices could well fall below this level.
Dominic Schnider, Analyst UBS AG