[miningmx.com] – HOW could the gold market end in such a heap, so quickly? Why did it happen, and who’s doing it?
Perhaps more importantly, when will the gold price recover? That’s a question worth tackling if only because thousands of jobs are on the line, especially in South Africa. Quite frankly, at gold in the region of $1,200 to $1,250 per ounce, most of the world’s gold companies aren’t producing any cash.
Liquidations in gold-backed exchange traded products (ETNs) began at the beginning of the year. Then, following rumours that the US Federal Reserve was going to stop buying bonds – a way of injecting money, or liquidity, into the financial system – the rout in gold really got under way.
In essence, the US Fed was telling the market the economy could soon stand on its own two feet. No need then for tangible, palpable wealth like gold which gives investors a comforting feeling during hard times than essentially worthless bits of paper, called currency. It’s the commonest reason cited for interest in gold, but no-one really knows if this is how the gold market is driven.
Regardless, the store-of-wealth argument, the one that says gold is the last resort in times of financial distress, is also an excellent excuse for a short (sell) when good times return.
In any event, the US Fed confirmed on June 19 that it would “taper’ its asset-buying strategy. Instead of providing comfort to the market, investors in gold took taper to mean like a coffin, and have been trading off the prospect of tapering since. The result has been to take a meat hammer to the gold price.
There was a third consecutive liquidation in gold positions on Comex. In the week that ended June 28, net speculation positions fell about 33.7 tonnes. Speculative shorts, those who think the gold price will continue to fall, grew by 19.6 tonnes representing a new five-year record of 402.8 onnest – more than 3.5 times the five-year average which is 116.2 tonnes.
Sales in ETNs also continued to fall for the seventh consecutive week. Sales totalled 140.9 tonnes from 19.2 tonnes of liquidations in the previous week. If the data makes your eyes droop, just know that this enervating for the gold market.
At its final London fix for the second quarter of 2013, the gold price was at $1,192/oz – its lowest level since August 2010 and 25% down on its level at the beginning of the quarter. This represents the worst quarterly return since 1900 – when cars were a rarety and streets in London were still lit by gas lamps. The price of gold was 7% lower in one week alone.
So what now? According to David Davis, a well known gold sage at Standard Bank Group Securities, there will be a moderate recovery in the gold price. He thinks most of the pain is over.
“We believe that the price will come off a low base at a moderate rate,’ said Davis. At these lower levels, it becomes pretty attractive to buyers of the physical metal, such as jewellers, to dive back into the market. There is also expected to be some central bank buying as well.
Said Macquarie Research: “So extreme has the price move been, we’re tempering our bearishness’. It believes the market may have got ahead of itself in anticipating the tapering of US Fed asset buying; that the price is nearing the marginal cost of production, and that being short on gold is now a crowded place to be (even though, at the time of writing, the market was technically still long).
William Tankard, a gold analyst for Thomson Reuters GFMS which monitors the gold market, said the gold price could trade up to $1,400/oz, but the medium-term outlook seemed depressed. “The list of negative factors for gold has grown in recent months,’ he said. Investor disillusionment would set the scene for a “multi-year bear market for gold’.
Davis has scaled back SBG’s forecast for the gold price this year to an average of $1,455/oz from a previous expectation of $1,700/oz. That’s how quickly the market turned against gold.
