Just over a year ago, Morgan Stanley's analysts argued that the "four pillars" of a gold bull market would send the yellow metal to $2,175 by the end of 2013. These pillars:
- Rising investment demand through ETFs
- Controlled central banks selling, and significant buying by emerging market central banks
- Gold buy-backs
- Weak mined supply growth
But in the wake of the recent sell-off, the analysts led by Peter Richardson have published a note titled "Gold: Crumbling Pillars."
"In our view, the dramatic sell-off in the gold market since 12 April has all the hallmarks of panic-driven, stale long liquidation, stop-loss and capitulation selling in the face of a concerted short sale that began in New York on Friday April 12," says Richardson. "We trace the origins of the short sale assault to the 10% reduction in CME margins for gold futures contracts that took place in November 2012."
"The subsequent the erosion of some of the major pillars supporting the gold bull market that occurred in the interim provided fertile ground for such a successful and attractively priced assault on the long skew to investor positioning in the market."
They note three trends that have destroyed their old thesis:
- ETF liquidation
- Speculation over European central bank selling
- Nervousness over the possibility of the Fed pulling QE early
Richardson and his team have slashed their gold price target to $1,487 for 2013 (from $1,773) and $1,563 in 2014 (from $1,845).
This is much higher than than the $1,370 level we're seeing today.
But that's not to say gold will head straight up from here.
"Given the magnitude of the volumes traded in futures markets over the past three days, the dramatic rise in open interest and the heightened volatility of recent days, we are reluctant to try and identify a hard floor in the retracement that we have seen in the spot market," they warn.
Here's a look at the ugly gold chart of late:
 Morgan Stanley |