The dramatic selloff in gold captured financial market headlines, and bargain hunting is curbing those losses only slightly as the mood in the precious metals turns decidedly bearish.
Among commodities markets mavens, Monday, April 15, 2013, will be remembered as the day that the price of gold fell by an astonishing 9% in a single day, the precious metal’s largest one-day drop recorded in nearly three decades, leaving gold languishing at only $1,361 an ounce as of the end of futures trading late Monday. While bargain-hunters, some of whom may well have missed out on gold’s big gains recorded between 2007 and 2011, stepped into the market earlier today to pick up some gold, their buying only pushed prices about 2% higher, with gold touching $1,400 — well below the high of $1,900 it recorded in August 2011. Indeed, the precious metal is now firmly in bear market territory, having fallen 27.5% from those highs.
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Although the latest and most decisive selloff in gold — the one culminating in yesterday’s plunge — began last autumn, gold has been a net contributor to investors’ portfolios (on an absolute price return basis) during every year since 2001. The financial crisis simply fanned investors’ enthusiasm for gold, which glittered more brightly when set beside the gloomy outlook for stocks and the liquidity crisis that afflicted the bond market. Even as investors returned to equities and fixed income securities in 2009, they didn’t abandon gold, viewing it as a safe haven and a protection against inflation that might be triggered by accommodative central banks. Indeed, until last year, as central banks’ balance sheets increased, so did the price of gold.
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What changed? There are many theories. Speculators have flocked to gold in recent years, although the market itself remains — relative to other asset classes — thinly-traded and illiquid, thus ensuring that any dramatic move is magnified still more. Reports that Cyprus may be selling some of its gold reserves certainly contributed, as did anxiety that the Federal Reserve may ease up on its asset purchases later this year, reducing some of the fear of Fed-generated inflationary pressure. One of the catalysts may well have been reports out of China that economic growth will be far more modest going forward than it has been in the recent past — and China is a key buyer of gold, as it is of other commodities. Generally speaking, however, the interest on the part of institutional investors in maintaining significant net long positions in the gold market seems to have abated considerably over the course of the last year, as the Datastream chart below reflects. That suggests that when the selling pressure hit the market, there was relatively little buying interest until prices fell well below the key technical support level of $1,540 an ounce.
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Monday’s decline was the culmination of what has been the first 20% plus slump in the price of gold since 2008. That previous decline was followed by a 168% increase in the price of the precious metal between November 2008 and August 2011. But few market pundits are suggesting that the selloff in gold makes it a “buy” at its current levels. Indeed, Bank of America Merrill Lynch cautioned clients that it saw “no compelling reason” to buy gold, while Birinyi Associates noted that after past 20% declines, the price of gold has gone on to fall a further 14% over the coming 10 months.
Regardless of how accurate or prescient those comments prove to be, for the time being gold seems to have lost most of its luster.
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