The yellow metal’s performance marks the first back-to-back quarterly loss since 2001, placing the gold market in a “recession” (the official definition of an economic recession is two subsequent quarters of negative GDP growth).
Gold is still well clear of bear market territory however which would constitute a 20% retreat – to around the $1,520 level – from the record high above $1,900 set in August 2011.
A number of factors have hurt gold this year and is likely to continue to tarnish its prospects:
Increasing evidence that gold is fairly priced:
- A correction after gold’s near 20-year bear market had a certain inevitability to it, but at current levels not even the most ardent backers argue that the metal is seriously undervalued.
- Compared to other commodities including oil, silver, other metals, and stocks gold is now priced close to historical ratios and appears overvalued on a 10-year horizon.
- Plot gold against the consumer price index starting in 1975 and today’s price is double the historical average, suggesting gold is 100% overvalued in terms of real purchasing power.
- Gold is increasingly seen as just another asset class, with rotation in and out, now that the fundamentals of the gold market are more in line with historical trends and other investment vehicles.
Growing consensus the US is closer to ending its ultra-loose monetary policy:
- The Fed has been reviewing its quantitative easing program and is eager to throttle back asset purchases at the first signs of a solid economic recovery in the US, evidence of which is increasing.
- Chairman Bernanke has poured more than $3 trillion of easy money into the US since December 2008 when Q1 kicked off and the pile continues grow at a rate of $85 billion a month. QE has taken gold from $837 to where it is today – up 90% – thanks to gold’s perceived status as an inflation buster.
- The problem now is inflation remains in abeyance and the next move for rates can only be up.
Risk-taking is making a comeback:
- US markets are back at record levels, the clearest sign that investors’ appetite for riskier assets has been more than whetted and the hard-asset qualities of gold is no longer held in such high regard.
- Not even the doomsday scenarios flowing from the disaster unfolding in Cyprus could convince investors to opt for the safe haven that gold is supposed to provide.
- In the absence of a catalyst on the scale of global financial collapse or the sudden – and unlikely – emergence of hyperinflation, gold is likely to continue to drift lower.
Physical demand may not be as strong as thought:
- After a 17% jump in purchases in 2012 to 535 tonnes, central banks have continued to buy up gold, but as most vividly displayed by Brown’s Bottom, relying on central banks to gauge future prices can be a mug’s game.
- China’s central bank, seen by many as the gold buyer of last resort, has poured cold water on speculation that it is becoming a more active buyer, preferring to keep gold’s proportion of the country’s reserves exactly where it is today.
- The likes of South Korea and Russia stocking vaults – if they continue to do so – is not enough to make up for falls elsewhere especially no. 1 consumer India, where cutting off demand through taxes and other means is official policy.
- Historically high prices – gold continues to make new highs in the local currencies of India, Japan, Brazil and others – are choking consumer end-demand, forcing devotees of the shiny metal to buy on dips only.
Net selling of gold-backed exchange traded funds:
- In Q1 gold ETFs – there are now 143 listed around the world, 53 of them backed by physical gold – experienced record outflows of 180 tonnes with grandaddy GLD dropping 130 tonnes, more than erasing the 96 tonne increase for the entire 2012.
- ETFs have played a central role in gold’s rise – when the products were first introduced in March 2003, an ounce of gold could be picked up for $330.
- If this momentum is thrown in reverse it could do great damage to investor confidence in gold among retail and institutional buyers.
QUICK FACTS: Gold ETFs, the people’s central bank
