Gold prices could average $1500 per ounce over the course of this year, gradually dropping to $1375/oz by the end of 2013, according to strategists at Societe Generale.
"This 15% fall is quite dramatic especially compared to the Bloomberg consensus forecast of $1752/oz by the end of 2013," SocGen's Patrick Legland wrote in a research note under the headline "The end of the gold era."
The rally in gold prices over the past five years was driven by fears that money-printing by major central banks would lead to very high inflation but so far price rises have been contained and now there are three factors that could put a stop to the rally, according to the SocGen note.
The three factors are: better economic conditions that would justify an end to the Federal Reserve's quantitative easing policy, under which it is buying assets on the markets to create money, fiscal stabilization, and a rise in the US dollar.
"It seems unlikely that investors would want to add much to their long gold positions in this context. If so, the gold price would trend lower at pace as the physical gold market is seriously oversupplied without continued large-scale investor buying. Selling by investors would add fuel to the fire," Legland said.
"Our central scenario calls for a gentle bear market over the next several years," he added.
But if global GDP and real interest rates rise significantly, the US dollar strengthens significantly, the US fiscal stabilization is quick and inflation expectations are muted, it is likely that there will be increased selling of gold ETFs, a significant liquidation of Comex futures, a cut in buying by central banks, "dis-hoarding" of gold bars and "a huge revival in producer hedging," which could lead to a drop of between 20% and 30% in the price of gold, according to Legland.
But he added: "We believe that this crash scenario is less than a 20% probability."
For investors to benefit from the fall in gold prices, the SocGen strategists recommend three strategies.
The first is selling a 1-year call gold option with an $1800 strike and use the premium to buy a 1-year gold put option with a strike at $1440; the second is to short a 1-year gold call option with a $1700 strike and buy a 1-year put option with a $1510 strike and the third is to short gold against palladium.
"We forecast the palladium price to average $850 in the fourth quarter of 2013 and to have reached $1,000 by the end of 2014. The palladium/gold price ratio should trend higher at pace over coming quarters and years," Legland wrote.
Gold was trading at $1598.2/oz on Tuesday at noon in London, nearly flat on the previous trading session. Palladium was trading at $772, nearly 1% down.
- Follow us on twitter @emrgingmarkets