Gold has traditionally been known for its safe haven status,which holds up and increases in value in dire economic and political circumstances. Today,if we look at the world all around us,we notice gloom and doom. The asset class of choice that should traditionally hold value under these circumstances is gold.
When Lehman Brothers declared bankruptcy in September 2008,investors rushed to buy gold. When the eurozone crisis erupted in 2010,they bought more. When the US lost its AAA debt rating last summer,they bought even more. However,for some reason,gold has lost its safe haven status of late and is just being traded like any other asset. Stocks fall,and gold falls with it. Oil falls and gold falls with it. Stocks go up,and gold goes up.
The widespread apathy towards the precious metal has taken its toll on prices. Last week,gold slid to a four-month low of $1,527 a troy ounce,down 20.5% from its record high of $1,920 last September. Not only has gold fallen in price,but it has fallen most when fears about growth and the eurozone crisis have picked up,confusing investors who bought it as a haven from financial turmoil. Some asset managers have also been selling a portion of their gold holdings,according to the World Gold Council. Investor positioning in gold futures and options is the least bullish since December 2008.
Hedge funds have reduced their exposure to commodities overall by 15% in the latest reporting period,with exposure to gold taking the biggest hit and resulting in what Bloomberg News calls a flight from gold by investors. Particularly in the US,but also in Europe and Asia,interest in gold and silver has waned. Western importers say that sales in the past two months are down 50% or more year on year. The shift is most clearly seen at the level of coin demandoften seen as a leading indicator for sentiment.
Sales of gold American Eagles,the popular investment coin,are down 63% year on year since February,according to the US Mint. Sales of Vienna Philharmonics,more popular in Europe,fell 19 % for gold and 31% for silver in the first quarter,according to the Austrian Mint. With even retail investors appearing to lose interest in gold,the overwhelmingly bullish consensus among traders is being questioned. Part of the reason for the fall in demand is the better economic data emanating out of the US that has dimmed hopes of further quantitative easing,or emergency Federal Reserve bond-buying.
Lets have a look at the fundamentals that drove the gold price down about 20% from the record peak of $1,920 per ounce registered in September 2011.
First and foremost,it rose too high,too fast. In the nine-week period between July 1 and September 6,2011,gold prices shot up by 30%,from $1,478/oz on July 1 to $1,920 on September 6,2011. Thats not the hallmark of a sustainable,safe haven investmentand it was proved so when prices slumped more than $360/oz to $1,528/oz within a short period before regaining some ground. Second,gold prospects were dampened when India,the worlds largest gold consumer,decided to add an import tax on gold and a new tax on jewellery earlier this year in a bid to reduce gold imports and contain the countrys ballooning current account deficit. That,combined with a weakening rupee,meant that gold became very expensive for Indian consumers. Latest World Gold Council data shows that Indian consumption dropped 29% to 207.6 million tonnes in the first quarter of 2012 compared with the same period in 2011.
In India,giving gold as small gifts has totally stopped,and people now buy 25-30% less weight than usual for weddings. Unless there is a clearer message emanating from the US Federal Reserve on the continuation of its quantitative easing programme,gold will at best remain volatile. The traditional link between gold and inflation-adjusted interest ratesas interest rates fall,so does the opportunity cost of holding goldhas also broken down. I am not hearing the intensity in peoples voices now in terms of being driven by fear to buy precious metals. Apart from frenzied buying during Akshaya Tritiya 2012,the past two months have been quieter than any time since 2007.
The traditional prop of the Asian physical markets has been absent. Despite the recovery that pulled gold prices back from bear market conditions and lows under the critical $1,527 pivot point,the latest set of CFTC positioning reports does not offer much in the way of encouragement for the bulls. The net speculative length in gold is currently hovering near a one-year low of just over 330 tonnes. If Greece were to leave the eurozone,gold could initially fall on euro weakness and a flight to cash. The extent and length of any drop in gold ultimately could be influenced by how central bankers and other authorities view any Greek exit. If they decide to build a very strong wall to prevent the contagion spreading,that could again be bullish for gold. The yellow metal might then bounce due to a policy response from central banks. At least there will be an end to the horror-thriller. As a German proverb puts it,Better an end with horror,than a horror without end. The European Central Bank may seek to backstop the financial system and the Federal Reserve might implement quantitative-easing measures to help the US economy stave off the spillover weakness from Europe. That would potentially mean concerns that inflation is here to stay once things stabilise on the euro front.
Furthermore,gold may also rise simply because the long-running Greek debt saga would no longer be an anchor for the US greenback.
The author is CEO,Global Money Investor