Expectations
that the US Fed will reduce quantitative easing, in a bid to curb
inflation concerns, have burdened the price of gold and as a result have
prompted UBS to reiterate its advice to investors to protect their
positions over the next three months.

The gold price has fallen sharply in the past few days, dropping to
its lowest level for more than two years, below $1,400 per ounce. In
September 2011, it hit a high of over $1,920 per ounce amid fears about
developments in the eurozone and central bank money printing (aka
quantitative easing), as well as expectations of continued purchases
from emerging market countries such as China. However, a number of these
factors have either become less significant or been fully priced in,
commentators say. Firms such as Goldman Sachs and Citigroup have become
negative on the metal. Meanwhile, Bloomberg reported that hedge
fund manager John Paulson's bets on gold, which have been confounded by
market developments, have wiped out almost $1 billion of his personal
wealth
in the past two trading days.

Gold “finds no support in the discussion among FOMC [Federal Open
Market Committee] members to taper off – or to halt – the US Fed's
quantitative easing programme over the coming quarters. We therefore
expect the fragile sentiment of the yellow metal to continue in 2Q13
with the bias to break below key support levels,” said Dominic Schnider,
head of non-traditional asset classes research at UBS CIO Wealth
Management Research.

In its latest gold report, released yesterday, UBS said the lack of investment demand due to fading inflation concerns in the
Western world, a bias towards more US dollar strength in the short run
and a bull run in US equities are set to trigger a gold price decline
beyond $1,525/oz.

“Although we think that the decline in the gold price is overdone and
does not correspond with our outlook of ongoing negative real interest
rates, even long-term investors should seek out short-term price
protection. We also advise investors to avoid gold as an underlying for
yield enhancement strategies for the time being,” Schnider added.

To reflect a lower starting point for its 12-month forecast, UBS
lowered its long-term gold forecast to $1,750/oz from $1,875/oz.

“That said, we reiterate our message that the developed world still
has issues to resolve that favour debt monetisation and money's loss in
purchasing power,” Schnider concluded.