Gold has been on a bullish ride over the past ten years. But this week we saw the commodity falling to its lowest levels since the last July. In 2011 prices briefly reached a record of over $1,900 per ounce. Now they are nearly $300 down from this former level.
Since the beginning of 2013 gold traders’ sentiment keeps changing. Now investors see quick profit opportunities elsewhere. The global economy could reach a pace that may lead to a full recovery. Then we would no longer need the central banks’ policies that supported the past few years rally.
On Thursday, gold traded at around $1,579 per ounce. In earlier trading the commodity reached a bottom of $1,554.49 per ounce.
The yellow meal role should be now questioned from a structural point of view. Consider the current US situation. It is sustainable, with no aggressive monetary policy. In this case, the long gold market cycle from 2001 is arguable. So, it does not seem much likely an inflection point to be reached.
There are a lot of reasons which rise concerns about gold prices. In 2013, global equities had a hard rally. Such a fund flow data indicates that now investors are shifting their assets appetite. Riskier areas are preferred rather than safe haven assets. Bonds pay interest, for example, while gold doesn’t. Therefore this is bad news for the precious metal.
Late last Wednesday, the result from Federal Reserve monetary policy meeting came out. The meeting concerned the upward trend in asset prices. Also, a suggestion for the reduction of bond-purchases by the US central bank was brought forward.
The Federal Reserve expanded its balance sheet during the financial crisis. Gold followed right away with an upward trend in prices. But projections for the end of central bank’s emergency measures caused a nine-month low in gold price.
Recently the US dollar gained some momentum. That depressed the yellow metal in addition.
Gold had positive performance for many years since it was seen as a store of value and inflation hedge. Also, the negative bond with the dollar played its role during the period.
Now, these two drivers are not doing well to support the metal. It is time when we have to turn up to supply and demand to find some clues.
The latest investors’ attitude suggest that concerns for the strength of the recent rally are real. The appetite for gold grew during the financial crisis. At the same time retail and institutional investors increased the usage of ETFs. That way they had easy access to benchmarks and asset classes.
Therefore more than 2,000 tons of gold are kept in physical bullion ETFs. That is mostly by investors who have used the funds as inflation hedge.
Such calculations have been made for the first time to a commodity asset class. If in investors leave ETFs it is very likely that the market will fill with physical bullion. There could be possible shift of physical gold demand sources. India has the largest global gold demand market. The country is trying to shrink its demand in order to reduce growing deficit.
Yet, during the financial crisis the demand for gold remained strong with support from emerging markets. As long as the Chinese economy matures, the country’s demand for gold is expected to increase. When the middle class raises, the consumption and demand for luxury items propels.
In recent years, emerging markets’ central banks were also substantial buyers of gold. They purchased yellow metal to hedge inflation that lowers the value of their dollar holdings.
The ones who contributed the most to gold demand recently were western financial investors. According to experts, that situation is changing at present. Many traders believe that it is too early to look at the end of gold’s bull ride.
The bullish projection is based on two factors. First of all, the global economic recovery is still keeping its sluggish pace. Second, central bank won’t be able to resist further monetary easing in the current global economy setting.
New drivers could come out from nowhere. Yet, the fact that the US Federal Reserve will always be there giving persistent support to the yellow metal remains almost certain.
Many believe that big outflow from physical ETFs is not very like to happen. That is because interest rates are still stuck at historical lows. Also nothing hints that central banks would change something about that. Still the cost of holding gold against cash is too low.
Investors won’t be forced to sell their gold holdings unless the interest rates rise. Therefore it is expected that gold prices will recover from current levels along 2013.