As predicted in these pages six weeks ago
, investors are running out of reasons to buy gold. The ancient store of value’s market woes are multiplying. Buyers are fleeing gold funds on the scantest evidence that the US and Chinese economies are picking up steam. The value of exchange-traded products holding the metal has slid by nearly 5%
this year, according to Bloomberg. Gold prices are down by almost exactly as much (no coincidence perhaps). They have declined more than 11% since a peak last October.
(NYSE:GS) this week became the latest market maven to turn bearish on gold. It slashed its 2013 price outlook to $1,550 an ounce from $1,810, a 14% correction. Goldman was gloomier still on 2014, predicting an average price of $1,450. That’s 8% off the current price of about $1,580. “The turn in the gold cycle has likely already started,” the giant squid of investment banks opined.
So is anybody still enthusiastic about gold? Yes, a very important group of somebodies: central banks in the developing world who are growing increasingly nervous about their mountainous reserve holdings of dollars, euros, and yen. Private investors may be experiencing “fear fatigue,” as Ross Norman, head of the UK precious metals brokerage Sharps Pixley puts it. Most of the dire outcomes predicted for paper money and securities over the past few years have not materialized, yet, reducing the allure of stacking up gold bars in the basement. But central bankers from Brazil to Korea want to diversify their future away from world currencies that seem to be in an unprecedented dilution race. That should help put a floor under gold prices, at some point.
Central banks unloaded gold reserves for decades until the 2008 global financial calamity. The metal seemed an anomaly for official purposes once Richard Nixon took America off the gold standard in 1971. In 2007, treasuries sold a total of 650 tons of metal.
Then came quantitative easing and its analogs in Europe and Japan. Developing-world central banks quietly lost some faith in their big brothers from the financial centers, and started stocking up on gold again. Net purchases hit 535 tons last year, a 17% jump on 2011 and the biggest raw number since 1964, according to the World Gold Council
. Central banks intensified their gold rush as the price fell in Q4 2012, purchases running 29% ahead of the year-earlier period.
This trend has room to run. Developed economies, which racked up their big financial surpluses pre-1970s, still hold most of their savings in gold. The US, Germany, Italy, and France all have more than 70% of their reserves stashed in bullion. For developing countries that have blossomed as creditors over the past few decades, the picture is very different. Gold accounts for just 1.7% of China’s monetary reserves, 2.6% of Singapore's, and 9.5% of Russia’s, by WGC figures. They have a lot more gold to buy to achieve any kind of balance with their T-bill and Bund holdings.
Can this buying revive the wilting world gold price? “The short answer is it hasn’t yet,” says Bart Melek, head of commodities research at Canadian bank TD Securities.
Gold presents an extraordinarily complex demand picture. One-half of the market (more or less), jewelry sales, is driven by optimism. The other half, savings and speculation, thrives on pessimism. Even at 50-year highs, central bank purchases account for a modest 12% of world demand. A bigger 22% slice comes from physical sales in gold-obsessed India, where the government has been trying to tamp down imports with uncertain results. Indian consumption dropped 12% in 2012 by official statistics, but roared back in the fourth quarter with a 41% jump over Q4 2011.
For now the market is moving on neither of these fundamentals, but on investor sentiment – particularly ETP holdings, even though these are a tiny part of world gold demand. But once a little more froth steams off the top of the market, investors should watch central bank and Indian buying as signals for if and when to get back in.
No positions in stocks mentioned.
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