Gold was mauled this week as commodities sank to a 13-year low.
It may get a lot worse, according to Morgan Stanley, which said that, under its worst-case scenario, bullion may tumble to US$800 (S$1,095) an ounce. To get there requires US policymakers to start raising interest rates, another correction in China's stock markets and a selldown of reserves by central banks, analysts said.
The metal is more likely to trade at about US$1,050 an ounce, according to the bank, which left its 2015 forecast unchanged. The price was US$1,098 yesterday.
Gold has fallen out of favour with investors as the Federal Reserve prepares to increase borrowing costs, boosting the US dollar.
Prices could drop below US$1,000 an ounce, according to Goldman Sachs analyst Jeffrey Currie, while Standard Chartered said it will probably extend losses.
The rout in bullion helped drag the Bloomberg Commodity Index to its lowest level since 2002 as crude oil and base metals fell.
"The backdrop for this commodity complex is deteriorating," Morgan Stanley said in its July 22 report, referring to precious metals.
The bank's unchanged forecasts have greater downside risk following July's selloff and persistent weakness in China's equity markets, it said.
Gold for immediate delivery sank to US$1,086.18 an ounce on Monday, the lowest level since March 2010, according to Bloomberg generic pricing, and it last traded below US$800 in 2008.
Morgan Stanley's 2015 forecast is US$1,190.
Investors are cutting positions on bullion-backed exchange- traded funds as prices drop and banks issue bearish forecasts. The holdings shrank 4.8 tonnes to 1,560.7 tonnes on Wednesday, dropping for a fifth day, Bloomberg data showed. They have contracted in nine of the past 10 quarters.
Fed chairman Janet Yellen reiterated last week that the central bank will boost borrowing costs this year, and economists projected a 50 per cent chance of lift-off in September, according to the median probability of 46 economists in a Bloomberg survey. Higher rates can draw investors towards bonds and away from gold.
China's announcement last week - that it had added less gold to reserves in recent years than had been expected - hurt prices, Morgan Stanley said. The update from China followed other events that were bearish for bullion, including lower risks from the Greek debt crisis and prospects for higher rates, it said.
"It's possible that the next short-term driver in metal markets will be declining oil prices," Morgan Stanley said, citing crude prices in the US and Europe that dropped between 10 per cent and 16 per cent in the past four weeks.