The four-month slump in gold and other metals by nature is setting up a buying opportunity somewhere on the horizon, but it could be months before a solid entry point materializes.
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Cash and gold
A cruel autumn has morphed into a cold winter for the metals, which have been stung by worries over global growth, a resurgence in the U.S. dollarand a general risk aversion that likely will carry into 2012.
Gold in particular has taken a beating. The yellow metal, seen as a hedge against both market disruptions and inflationary monetary policy, is around bear market territory since peaking out above $1,900 an ounce in early September.
While the long-term technical picture propelling gold in the earlier part of the year remains in place, the current outlook is for more trouble ahead.
"Gold overall will continue to perform well in the next, say, 10 years," said Shelley Goldberg, director of global resources and commodities strategy at Roubini Global Economics in New York. "But you're going to see tremendous volatility, you're going to see a selloff like you've seen in the last couple of weeks."
Gold's primary foe has been a more sanguine sentiment regarding inflation , with worry instead shifted to muted growth.
The Federal Reserve's easing policies had caused the U.S. dollar to slump dramatically. But that trade has reversed sharply since late October, with the greenback surging against the euro as investors worry that the worst may be yet to come regarding the European sovereign debt crisis.
"We fear that there is still more selling to be done, that there is still a great deal more liquidation to be effected and that worse lies yet ahead," Dennis Gartman, hedge fund manager and author of The Gartman Letter, wrote Thursday.
European uncertainty, in turn, has caused a slump in the other metals such as copper and platinum — industrial metals that are sensitive to changes in economic growth — as well as gold.
Add to the mix worries about whether Chinawill see a temporarily slowdown or something worse, and it doesn't bode well for investments connected to growth.
Investors, then, are left to ponder when the selling will stop and a good buying opportunity will emerge. With a near-recessionary global forecast the consensus, that could take a while.
"There is a general mentality of risk-off right now," Goldberg said. "With the industrial metals there is more downside risk mainly just due to the global economic slowdown, in particular in light of the potential for China to buy less."
Industrial metals "have taken quite a hit," she added. "You could see potentially another 10 percent down before a good entry point."
Platinum is on a particularly rough ride, tumbling 28 percent, as the metal used in making catalytic converters for automobiles continues its tradition of being more volatile than its counterparts.
The upside to the metals outlook is that there does appear to be a bottom in sight, if not immediately in view.
In its 2012 forecast, Morgan Stanley sees gold zooming to $2,200 an ounce and also is bullish on silver and copper , which it sees as a solid performer through 2014.
"Supply side difficulties remain, which should keep copper prices elevated and well above marginal cost until such time as the global inventory pipeline is replenished and a more reliable supply environment ensues," Hussein Allidina, head of commodity research at Morgan Stanley, said in his outlook.
Morgan Stanley is neutral on aluminum and platinum and bearish on nickel, lead and zinc.
Overall, Allidina said investors would be wise to pick their commodities selectively — whether in metals, grains or otherwise across the spectrum — as long as dollar strength continues and the global economic picture remains clouded.
"We remain more selective about commodity exposure, preferring relative value trades and exposure to commodities that perform well in low-growth environments," he wrote. "Given the low-growth environment, we do not feel it is prudent to be long the commodity complex indiscriminately."
Allidina added that it is "too early for any rebound trade" and "beta trades and bets on a cyclical recovery may be premature."
Indeed, in the near term counting on a commodity bounce could be hazardous. As recently as October, Goldman Sachs predicted that gold would rise into the end of the year — it did just the opposite — and portfolio mangers who underperformed may have to continue to sell their gold holdings to raise cash.
The most popular gold exchange-traded fund, the SPDR Gold Trust , has shed $2.2 billion in December, according to TrimTabs market research.
"The year end is always a bad time to jump in," Goldberg said. "There's a tremendous amount of uncertainty. There's window-dressing, and the euro zone is far from getting to a point where people feel comfortable. If I were short, I would stay short."
