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Gold in the Bear Pit
July - August 2013 | Companies and Markets

The gold price is continuing to fall. The uninterrupted decline began at the end of 2011, and the market has had a distinctly “bearish” trend. The precious metal has already lost 26%, and experts say this is not the limit. With the current price at $1,390 per ounce, gold could still slide to $1,000.

Gold prices are continuing to reach record lows. A continuous drop of 20 percent or more is classified as the beginning of a bear market. In May, the prices of gold futures contracts lasted for six consecutive days, during which the price lost 5.9%. This is the longest continuous drop in the past 16 months.

Ups and Downs
The gold price has increased seven-fold in the past 11 years. The main rises were during 2002-2008 and 2009-2011. The “golden maximum” was reached on Sept. 5, 2011, when the price hit $1,903 per troy ounce.

The financial crisis made gold the most expensive precious metal. But in August 2012, the ratio between platinum and gold, which expresses the cost of an ounce of platinum per ounce of gold, dropped to 0.8644, the lowest since 1985. And then in September 2012, platinum overtook gold. The difference between platinum and gold plays the role of an indicator of health of the world economy.

Since the beginning of 2013, the yellow metal has already fallen 17%. There was a particularly sharp drop in mid-April: In two days, gold lost 13% of its price, or $200. Thus, an ounce of gold fell to $1,360.60, followed by a short rebound.

A Trend or a Herd Mentality?
The latest fall of gold prices began in May, on the news that George Soros’s Soros Fund Management had reduced its holdings in the metal by 12%. The investors made that decision even before the April price collapse.

Soros Fund Management began to reduce its investments in gold last year, recording a 55% reduction in the last quarter of 2012. In the words of George Soros himself, the price of gold fell after last year’s collapse of the euro, and it no longer functions as a safe haven for investors.

The World Gold Council released data on the 13% fall in demand for gold in the first quarter of 2013, compared with the same period a year earlier. The offerings from ETF funds dumping their gold are growing faster than the demand for gold from China and India for jewelry, coins, and bullion, the Council noted. This information also affected the mood of investors. However, experts forecast that gold will continue to lose value. Credit Suisse analyst Ric Deverell thinks the price per ounce could fall to $1,100, and in the next five years, below $1,000.

Gold is still overvalued compared to other underlying assets, according to Credit Suisse. “Gold will collapse,” Deverell says. “It is no longer needed as a way to preserve savings, and the prospect of inflation in the next two to three years is much diminished.” Deutsche Bank AG economists make the same forecast, estimating that the price of the metal will go down to $1,050 per ounce.

However, First Eagle Gold Fund calls this trend an example of the herd mentality. Its analysts are convinced that the fall during the last couple of months means investors are simply frightened and are starting to dump the metal. The Fund suggests not hurrying to part with gold, as a hedge against a fall in currencies and other assets.

“Many people accumulated gold in the aftermath of the financial crisis in 2008, and with investors expecting economic improvement going forward, holdings in ETFs have more room to fall,” says Yang Xuejie, an analyst at Galaxy Futures Co. “There’s always some physical buying at lower prices; however, that’s not enough to take the market higher.”

While gold is losing ground, silver, despite the lower demand for it compared to gold as an investment component in the structure of demand, has recently been significantly more volatile.

Ole Slot Hansen, strategist and director of the Exchange-Traded Products Department at the Saxo Bank brokerage:
“The five commodity groups that showed the worst results belonged to the metals sector: Industrial, precious metals and platinum group metals – all, without exception, have come under intense pressure. Silver, which has suffered from its dual role as an industrial and investment metal, has fallen almost to its lowest level against gold since September 2010. At current prices, one ounce of gold is worth 60 ounces of silver. This is by comparison to 50 ounces at the end of 2012, when growth prospects looked much brighter. After a historic two-day fall, during which gold lost $213, the metal made cautious attempts to recover by the end of the week. However now, with the multi-year rally behind us, some players will find out that that sell-off was not yet the worst thing seen by market participants. The coming days and weeks will be very important, because the situation on the market is becoming a war of nerves. Will investors continue to reduce their investments in products on the stock index, having just begun in February, whereas hedge funds started to withdraw their funds back in October? Or will the current slowdown in economic growth, together with the rise in physical demand, result in some support and ultimately force the hedge funds to reduce their short positions? Although the technical picture suggests that a move toward $1,150 per ounce, we expect that at about $1,300, gold will find support; but any attempt to rise above this level will meet resistance at about the previous lower limit of $1,525 per ounce.”

Steen Jakobsen, chief economist at the Saxo Bank brokerage company:
“In the fairy-tale kingdom of macroeconomics, everything suddenly stopped when gold was subjected to the largest sell-off in its history – the largest two-day sale in history in nominal terms, and the fifth-largest by percentage. The reasons for this landslide sale range from the sales [of gold] by Cyprus to expectations that the Federal Reserve would reduce the volume of quantitative easing in the United States. But looking back, the rise in gold stopped at least 18 years ago! This hardly can be called a new paradigm. In fact, what could and should disturb the masters of money printing (also known as central bank policymakers), is the fact that, despite the huge quantity of money being printed, inflation is falling again, and its momentum indicator shows a decline in the rate of inflation and even shows deflation, but not reflation. It seems that there is no easy way out for the central banks. They wanted inflation, but they risk getting the opposite result, because they could not understand the economy and, even more importantly, the microeconomy.”

Text: Valeriya Khamraeva

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