Gold prices fall to three month low and set to go lower

Gold fell to its lowest point in three months on Tuesday as US policy makers came closer to reaching a deal to avoid default on October 17. US Senate majority leader Harry Reid, after talks with his opposite number Mitch McConnell on Monday, said they had made "tremendous progress."

Spot gold fell by 1.2 per cent to $1,256.96 in early trading. Despite the US government shutdown and fears over the future of the dollar, gold has gained little traction with investors. So far this year gold has lost a quarter of its value and April saw the worst two-day performance since 1983.

The story of gold over the past five years has been fascinating to watch and has been the subject of fierce debate among commentators and investors. Gold reached a high of $1921 in 2011 with fears over ultra low interest rates and seemingly endless money printing by central banks, leading many to seek refuge in the precious metal. However as the world economy has grown, albeit slowly, confidence has returned and investors are willing to put money back into the stock market. There has also been a decline in physical demand from markets such as China.

Following the announcement in June that the Federal Reserve was going to taper its bond buying programme, investor fears over inflation and asset price bubbles have receded and the price of gold has consequently dropped. Although it may not seem like it to consumers, global inflation has been falling. The JPMorgan global consumer price index, covering 30 countries and more than 90 per cent of global economic output had peak inflation in 2011 of four per cent. JP Morgan economists forecast inflation down to two per cent for the rest of 2013.

The past few weeks have seen a string of analysts and reports forecasting ever lower prices for the metal. Jeffrey Currie head of Commodities at Goldman Sachs described gold as a "slam dunk" sell. Goldman has forecast that gold may fall as low as $1,050 an ounce by 2014 with Credit Suisse forecasting $1,180. Morgan Stanley was the latest firm to take a bearish view on gold.

Morgan Stanley analyst, Joel Crane, speaking in a video report said:

We recommend staying away from gold at this point in the cycle.

Our forecast profile heading into next year is relatively flat against our expectations of rising real interest rates and the U.S. dollar.