Gold's downside to be limited by Asian buying in 2014, Western investors may stay out: Citi

NEW DELHI (Scrap Monster) : The recently released ‘2014 Commodities Forecast Report’ by Citi forecasts that physical buying by Asian countries may limit gold’s downside next year. Citi also sees very less chance for western investor demand to return in 2014. The rebounding global economies and relatively high opportunity cost of gold holding versus other assets class are the reasons cited by the global financial services corporation towards muted gold demand.

According to the bank, there are very little prospects of inflation expectations being a driving force behind renewed gold investment, especially when the US economy and much of the Western world operates well below any meaningful capacity constraints.

Gold returns for the year are now down 24% versus the S&P 500 index up 24% over the same period.  The opportunity cost of holding gold as opposed to other assets is high. As a result, funds are witnessing an exodus from gold to other asset classes. The clear evidence of this trend is the significant outflows from gold ETFs during September and October. While the bank expects outflows to slow from here, it sees little prospect of the trend toward outflows reversing in 2014. The gradually improving micro data may continue to support equity performance. Citi sees less chance for a sudden trend reversal.

The bank also forecasts a significant fall in direct investments in physical gold bars too, when compared to the previous year. The low Western demand may lower the projected uptake of gold bars by more than 300 tons during 2014.

Citi also mentions that the physical gold buying demand may continue to remain strong in Asia-especially China. Physical gold buying by India-though to a lesser extent, may also assist in limiting the downside for gold in 2014.