When The Rest of the World Sells Gold, Should You?
The number of news articles on gold has more than doubled in the past
two days as the U.S. Comex gold futures plunged 4.06 percent last Friday
and fell even more spectacularly on Monday by 9.34 percent. The
Monday’s percentage fall was the largest since 1983. The gold futures
traded at a record high of 751,058 contracts at the CME. On Tuesday in
New York, the gold futures rebounded 1.93 percent to end at $1,387.40
although they reached $1,404.20 at one point. The CRB Commodities index
dropped 2.19 percent on Monday, the largest percentage drop since 14
December, 2011. The S&P 500 index rebounded 1.43 percent on Tuesday
after selling off 2.30 percent on Monday while the Euro Stoxx 50 index
fell in the past three consecutive days by 2.43 percent. The Dollar
Index went up slightly by 0.13 percent on Monday, but dropped 0.81
percent on Tuesday as the Euro/Dollar surged 1.08 percent.
What Has Happened?
Market analysts have offered the following reasons for the “unexpected”
plunge in the gold prices. The equity markets and the broader
commodities have reacted negatively to China’s 7.7% yoy Q1 GDP figure
compared to the median Bloomberg forecast of 8 percent. Last week, the
news that Cyprus might sell 10.4 tonnes of its gold holdings has
triggered the fear that the other European sovereigns would sell a
higher amount to raise funds. The market also believes that the chance
of a “tail-risk” event has been significantly reduced with the ECB, the
Fed and now the BOJ taking some actions to boost economic recovery and
prevent the worse-case economic scenarios. This has prompted some
shifting of money from the defensive assets such as gold back into
equities although the recent weakness in the U.S. data has prompted some
movements back into the U.S. Treasuries, a traditional safe haven.
Global gold-backed ETF holdings have declined about 9.5 percent this
year. The important support level at $1,540 has also been broken. When
gold price breached $1,430, the selling became indiscriminate. Given
that the longer-term supportive fundamentals for gold have not changed
in just three days, a stronger argument for the vicious sell-off is the
short-selling by funds and dealers. Our CEO Ross Norman pointed out
that the selling of 400 tonnes was timed to get the maximum impact
especially with the sentiment towards gold already being weak.
What Can We Expect from Here?
The CME has subsequently raised the margin for gold by 19 percent which
will likely dampen the speculators’ interests to short more. However,
some funds may look to sell further to reduce risks. The Chinese and
Japanese retail investors have been seen to scoop up the cheaper gold.
The central banks including Sri Lanka and Korea still look to add gold
on a longer-term basis. The North-American gold miners may need to cut
back on spending and exploration if their all-in-cost level of $1,300 is
breached. While a trading range will take time to be re-established
and the physical buyers will re-assess carefully before buying, the gold
market will likely find a level where the longer-run fundamentals will
re-assert themselves in the next few months.
This story is provided by Sharps Pixley, for more information and content please visit: www.SharpsPixley.com
17 Apr 2013 | Categories: Gold
