But recent falls don’t necessarily spell the end for the yellow metal, writes Liam Ward-Proud
Gold has crashed spectacularly over the last three weeks, falling 10 per cent from over $1,390 per troy ounce in the middle of June to yesterday’s high of $1,260. This decline, triggered by the Federal Reserve hinting at a timeframe for the end of quantitative easing, has been partially reversed since last week’s lows of around $1,200. But prices remain well below January’s levels around $1,600.
The collapse parallels wider falls in the price of other metals, with silver and copper also experiencing declines in past months due to slowing growth in resource-hungry China. Because of gold’s status as a safe haven investment, however, its decline is a signal of a wider change in sentiment towards the global recovery.
US GROWTH: BAD FOR GOLD
In a recent research report, Goldman Sachs analysts projected that “gold prices will decline further, given our US economists’ forecast for improving economic activity and a less accommodative monetary policy stance.” The bank slashed its year-end 2013 expectations from $1,435 to $1,300, and its year-end 2014 forecast from $1,270 to $1,050.
Similarly, UBS has sharply decreased gold price forecasts in reaction to signs of recovery from the US. Such signals increase the probability of the Federal Reserve “tapering” its quantitative easing (QE) programme, thus decreasing the attractiveness of gold as an inflation hedge.
And the momentum behind a falling gold price has been accelerated by sell-offs by exchange-traded funds (ETFs), a widely accessible vehicle for investment in the yellow metal. UBS analysts recently reported declines in gold ETF holdings in successive weeks throughout June.
WEAK ASIAN DEMAND
But these fears are not the only reason for gold’s decline. Max Cohen of Spreadex says “demand for gold from China and India would usually put a floor below the potential falls.” However, as a result of the economic slowdown in China – with HSBC’s purchasing managers index falling to a nine month low of 48.2 yesterday – this support has failed to materialise. Cohen says that “the weak outlook for Asian demand has hurt gold. The worrying thing is that it isn’t showing too many signs of reversing in the near future.” Recent attempts by the Indian authorities to restrict gold imports to reduce the country’s ballooning current account deficit may further diminish demand from the Asian giants.
STILL A ROLE FOR GOLD?
Not everyone provides such a downbeat analysis, however. Capital Economics’s end of 2014 forecast for gold stands at $1,400, significantly higher than the $1,050 from Goldman Sachs. Its head of commodities research Julian Jessop argues that “gold remains very attractive culturally in large parts of Asia, and even when tapering does begin, the Fed’s monetary base will still be expanding.”
The persistent threat of inflation, even after the end of QE, has left hard-core gold-bugs more bullish. Euro Pacific Capital chief executive Peter Schiff maintains that “none of the problems that led me to buy gold ten years ago have been solved”. Loose monetary policy and large fiscal deficits spell disaster in the eyes of some, making gold’s rise only a matter of time.
But even if higher global inflation is not a strong likelihood, gold may yet find support. As Hargreaves Lansdown’s senior investment manager Adrian Lowcock says, “gold can be seen as an insurance policy, a hedge against opinions being too optimistic. Investors don’t have to think the end of the world is imminent to find a role for gold.”