FP Staff Apr 16, 2013
Gold futures prices on the Multi Commodity Exchange today fell to a 15-month low of Rs 25,270 per 10 grams tracking the international markets, where the metal witnessed its biggest one-day drop since 1983.
Gold prices, which had been plummeting since last week, fell another Rs 364, or 1.41 percent, to trade at a 15-month low of Rs 25,270 per 10 grams for delivery in June.
Here are seven reasons why the bullion is crashing
1. Global inflation is falling: According to the JPMorgan index, global inflation peaked at 4 percent in 2011 and has fallen steadily since. Global prices in February were up only about 2.5 percent from a year earlier. This reduces gold’s value as a hedge against rising prices. Hence, those betting on an outburst of inflation are scrambling to reverse their bets and exit gold positions at any price.
2. Rise of dollar: Another reason for gold’s short-term weakness is the rise of the dollar due to the economic crisis in Europe. The dollar has also moved up on the hopes that the US economy is emerging from its crises, which could nudge the Federal Reserve to withdraw the stimulus package earlier than expected. Analyst say that the Fed has given the signal that there’s a possibility to reduce QE and that took a lot of trust out of gold.
3. Worries over Chinese growth and a possible sell-off by struggling Cyprus’s central bank also pushed down the precious metal’s prices in the futures trade. Cyprus has created the fear that countries may sell gold in order to restore their sovereign balance sheets.
AFP
Reports are doing rounds that Cyprus is planning to sell some of its gold holdings. A European Commission assessment showed it was set to sell gold reserves to raise around 400 million euros ($525 million). While Cyprus’ gold sale in itself is small, heavily indebted euro one nations such as Italy and Portugal could also find themselves under increasing pressure to put their bullion reserves to work.
Market analysts said sustained weakness in the overseas markets where gold plunged over 9 percent yesterday to its lowest price in two years, put pressure on the precious metal prices in India.
4. A shift out of commodities into equities and bonds: Again the return of confidence in the US economic recovery, has seen investors move away from safe havens like gold into more riskier assets like gold.
According to an HSBC report, gold and the other precious metals have been weighed down by overall weakness in the commodities sector this year. In fact, the move down in silver has exceeded that of gold. Two major commodities, oil and copper, are also down 9 percent and 14 percent since mid February. Gold may simply be playing catch-up.
In contrast, the S&P 500 is up over 10% so far this year.
“It appears that commodities – including precious metals – have not benefited from the reflationary policies of central banks which include record low interest rates and massive balance sheet expansion. Instead financial assets, including bonds and equities have been the main beneficiaries. This may explain a switch away from gold. It also helps explain the steady outflow from gold-Exchange Traded Funds (ETF) this year.”
5. Paper gold holders are weak hands: According to James Kostohryz of The Street, the crisis today is the result of paper gold, i.e. gold ETF purchases in the past which allowed speculators to trade gold without having to actually buy, store and insure it. “Gold was being bought by them for essentially the exact same reasons that people have been buying Bitcoin: Pure speculation about doomsday scenarios, combined with a greed-laced ambition to capitalize on such calamities,” he says.
Hence as the gold price turns on speculators, they will simply dump it as impulsively as they bought it.
6. The announcement of a massive easing policy by the Bank of Japan. Japan’s easing monetary and fiscal policies could export Japanese deflation. While this may not be a valid explanation it is entirely possible that the lack of global inflationary pressure is working against gold.
7. Sentiment has suffered due to recent cuts to price forecasts for the precious metal and outflows from gold exchange-traded products. Goldman Sachs lowered its average gold-price forecast for 2013 to $1,545 an ounce. Deutsche Bank has cut its 2013 gold price forecast, saying returns from the metal may be on course for their worst annual performance since 2000.
According to HSBC, the robust gold bull rally of the past 12 years is probably over. “It may take a long time for investor confidence to return. But we do believe gold is becoming oversold and that tighter supply/demand fundamentals and a still positive macroeconomic background, will eventually lead to a steady grind higher.”
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