The recent gold price rally looks unsustainable and it's time to sell, Societe Generale analysts say, taking an opposite view to rival Deutsche Bank that only last week advocated buying the precious metal.
Gold prices have rallied 20 percent just two months into 2016 as investors seek refuge from the turbulence in developed equities and emerging markets.
The fear is also prompting investors to trim expectations of further interest rate hikes from the U.S. Federal Reserve this year but the reality is likely more upbeat, according to SocGen.
"Our economists remain confident that the recent financial market turmoil and slowdown in emerging markets are unlikely to cause a recession in the U.S. If they are right, then the market should gradually start pricing in a high probability of one rate hike this year followed by more next year as the U.S. labour market is becoming tight," SocGen analysts wrote in a note Monday.
SocGen analysts said gold is overvalued by around 6 percent currently and should be around $1152 an ounce instead. The spot gold price is around $1,245 an ounce.
Deutsche Bank on the other hand expects prices in the fourth quarter to be $1,230 an ounce in the fourth quarter. Spot prices were loweer when Deutsche had made the forecast.
According to SocGen, gold prices are inversely correlated to market expectations of a rate increase. In other words, gold prices fall as markets scale up bets on rate increases (on expectations of faster economic growth). Prices rise when the economic outlook is gloomy.
Gold prices have also yet to react to a recent recovery in expectations that the Fed will hike rates again by end-2016, noted the bank--which means there may be more downside for prices in the yellow metal.
Another potential headwind for gold could be the strength of the U.S. dollar, which gold is denominated in. Over time, dollar strength will cause the gold price to trade significantly lower, SocGen said.
Furthermore, with prices of many commodities at depressed levels, it is "unusual for the gold price to persistently diverge from the trend in the broader commodities market" as prices of the precious metal tend to move largely in sync with other metals.
To hedge on the short-gold trade, SocGen is also recommending taking a long position in the South African rand.
With commodities bouncing off November price lows, the rand is now 27.4 percent lower than its long-term 10-year average, reflecting significant depreciation over recent years, making it one of the most under-valued currencies according to SocGen's quantitative model, the bank said.