Gold has had a tough few days. A combination of a strong US dollar, looming interest rate rises on both sides of the Atlantic and an improvement in global economic fortunes prompted a ‘flash crash’ in the gold price at the start of the week, and as it ends there is no sign of an imminent recovery.
The Financial Times notes that, having declined by a further one percent to $1,084 in Friday trading, the precious metal is now at its lowest level since February 2010. CNN adds that gold had declined for ten straight sessions in the US, a losing streak unparalleled since 1996.
“To put that in perspective”, it says, “back then oil prices were fetching just $19 a barrel”. Without a major recovery today it will have racked up five consecutive weeks of losses, according to Bloomberg data.
Investors are apparently piling out of gold funds, but is the current slump a buying opportunity or will prices continue to slide?
Citibank analyst David Wilson told Business Insider he believes that the gold price will remain under pressure in advance of the Federal Reserve’s September policy meeting, at which it is now widely expected to raise the interest rate from its lowly 0.25 percent.
Climbing rates tend to reduce the attraction of non-yielding commodities such as gold, with analysts saying the next key milestone will be $1,044 an ounce, its 2010 low.
Others are even more bearish. Jeff Currie, New York-based head of commodities research at Goldman Sachs, said earlier this week in remarks reported by the Daily Telegraph that downward pressures affecting all commodity markets could force gold down below $1,000 an ounce. The paper says ABN Amro Bank’s Georgette Boele and Robin Bhar of Societe Generale also believe bullion will approach this symbolic threshold by December.
But others expect a recovery. CNN Money cites George Gero, vice president of global futures at RBC Capital Markets, who says gold might be able to withstand the strong dollar, which reduces buying power for gold, and that it should be “due for at least a short-term bounce next week”.
Profit Insider says there is reason to suspect China, which revealed disappointing levels of gold buying this week, could be set to invest more heavily in the metal to meet targets set by the International Monetary Fund to qualify the Renminbi as a reserve currency, which would prompt a surge. It suggests that the gold price could reach $2,500 an ounce, but not until later next year.
The gold price mounted a modest recovery yesterday following a sharp fall on Monday, but after closing below $1,100 for the first time in five years it is still hovering around this key threshold.
Analysts once predicted that gold prices would surge to $5,000 an ounce, but now many are saying that the precious metal could fall back through the $1,000 mark before the end of the year – and a slump into three figures could well trigger more falls.
Investors are beginning to take notice. Listed funds tracking the metal, which have been growing in popularity, saw the biggest outflow in two years on Friday, The Times reports.
So what is driving the recent slump and is it likely to continue?
1. The strength of the US dollar
The US dollar has been gaining in value on the back of consistently positive data on the economy, which spells bad news for gold. As the Daily Telegraph notes, the value of the greenback typically has an inverse relationship with commodities.
Why? Like other commodities, gold is priced in dollars on international markets. This means that when the dollar rises investors have less buying power and commodities become more expensive, “muting demand and sending commodity prices lower”, the paper says.
2. The strength of the US dollar, part 2
But that isn’t the only reason that gold sinks with the dollar surges. The Economist suggests that the declining gold price is also a product of investors re-evaluating the real price of the metal in response to currency movements.
Essentially, if the dollar increases so does the nominal value of any asset quoted in dollars. But if this runs counter to investors’ perception of the market, they are likely to sell to ensure they aren’t caught out later.
3. Interest rate rise
Another factor emanating from the US is the recent talk of an interest rate rise. The Federal Reserve has been dropping strong hints that it may increase the base rate from 0.25 percent sooner rather than later, and possibly this year. That will diminish the attraction of non-yielding assets
Since gold provides neither a dividend nor an income, there is an opportunity cost of holding the asset. That may be worth paying in bad times, when interest rates are low and the gold price is likely to be rising. When markets are improving, interest rates are rising and returns are increasing, that opportunity cost starts to pinch.
Not all the factors driving down the gold price originate in China: The Times points to China as another source of gold-sapping news – and, more specifically, to data showing that the country, which has designs on making its own Renminbi a reserve currency, has not been buying up gold in the quantities many have anticipated.
China’s gold reserves were up 57 percent, but this was about half what was expected. As a share of total reserves, China’s holdings were actually in decline. Chinese acquisitiveness was one of the key assumptions underpinning the market in recent years, so this constitutes a major hiccup.
5. Less bad news
Greece has stepped back from the abyss – at least for now. The global economy seems to be trundling along and Western countries are seeing a return to growth. An apocalypse predicted by many, which would have scared investors into assets such as gold, has not happened.
6. Technical trades
This last point is one often missed in analyses of any sharp market fall. Many trades are now executed on an automated basis, the Telegraph says, with software which is designed to buy or sell when a price hits a given high or low level to manage risk in big portfolios.
Gold has reached the sort of low where the ‘stop-loss’ trades kick in, further fuelling a sell-off. The irony is that these programs are designed to limit risk exposure and losses when in reality they often exaggerate market swings and increase nominal losses.
Will the slide continue?
There certainly seems to be a consensus that gold is not going rebound strongly any time soon. Some think the inflation-adjusted price for gold is even lower than $1,000, so it’s not out of the question that prices could continue to fall.
But if the macroeconomic picture were to change and become more negative, or China were to start buying in the way analysts have been predicting, attitudes to gold would probably change quite quickly.