Gold price movements defying logic

The Business Times
Neil Behrmann
10/10/2013

THE big question is why has gold been lacklustre in the face of a US political standoff and monetary easing, a weakness in the greenback, emerging currency upheaval and continued Middle East concerns?

Moreover, President Obama's appointment of Janet Yellen, a quantitative easing (QE) dove, as Federal Reserve chief, should in itself be another bull point for gold. The market expects her to continue with current QE well into 2014.

Since gold's peak of US$1,921 an ounce in September 2011, latecomer investors have had a torrid time. The price slowly sank in 2012 and in the second quarter of this year plunged from US$1,590 to US$1,180 an ounce, then rallied to US$1,420 in August and is now languishing at US$1,320 an ounce.

Most gold watchers focus on the investment and the so-called safe-haven status of bullion, but its demand-supply fundamentals are more complex than that. The market tends to swing between global investment and speculative demand and jewellery and other physical consumption mainly in China, India and other Asian markets.

Gold plunged in June because investors took fright and hedge funds and holders of gold exchange-traded funds (ETFs) dumped their holdings. The subsequent recovery came about because jewellery and other industrial buyers of gold took advantage of cheaper prices and bought.

Investors and speculators are nervous that the political battle between the Democrats and Republicans could cause a slide in equities, commodities, including gold and other risk assets, so they are only prepared to buy on dips. Reflecting their skittishness, gold recently plunged, by about US$40, to US$1,286 an ounce when Russian Premier Vladimir Putin diffused the Syrian chemical weapons crisis and the US began talks with Iran.

The price then rallied above US$1,300, but has not taken off mainly because demand from the two biggest consumers - China and India - has been slack in recent weeks.

According to estimates from Mathew Turner, precious metals analyst at Macquarie Bank, Chinese demand slowed in July and August when the price rallied. Shanghai gold was at a premium of US$40 over the international price at the start of July but since then has slipped to less than US$10. Statistics related to China are a conundrum because of obfuscation on the part of the authorities.

Mr Turner estimates, however, that over and above China's annual gold production of 413 tonnes, the country's net imports from Hong Kong were 818 tonnes in the first eight months of the year compared with 379 tonnes in the same period last year and 643 tonnes for the whole of last year.

An unknown proportion of imports and production could well be going into the central bank's reserves, so it is difficult to gauge consumption. China is completing a week's holiday to celebrate Golden Week, so demand is expected to pick up, especially ahead of Chinese New Year.

India, the world's second-biggest consumer of gold, has been a negative for bullion this year, said Mr Turner. A variety of duties and other import controls and the sharp devaluation of the rupee, which raises the internal price of gold, caused imports to tumble in recent months.

Gold refiners and traders are hoping that Diwali, India's festival and wedding season in November, will boost demand, but others say there could well be a switch to cheaper silver.

Traders and analysts also hope that once the US government shutdown ends and there is an agreement on extending the government's debt limit, there will again be a rush into equities and gold.

Macquarie, for example, predicts an average price of US$1,385 in the final quarter while 18 analysts surveyed by Bloomberg expect prices to rise compared with only eight who are bearish and four neutral.