Comment: Gold Bulls Have Suffered A Sharp Fall But Metal's Charms Remain

Tom Burroughes

15 April 2013

One cannot work for long around the wealth management industry before hearing about an asset with legendary qualities - with exceptions - for protecting wealth: gold. But recent sharp falls in the price level appear to have given gold holders a queasy feeling. How significant is this?

As of the time of writing – Monday afternoon around 13:00 GMT – gold in the spot market fetches just over $1,420 per ounce (source: BullionVault). Last week, the metal fell through the psychologically important round number of £1,000 per ounce (for those who price it in sterling), and below around $1,525, an important chart level that is closely watched by those looking for inflection points. Gold has already come a way down from its record high of $1,921, set in September 2011, almost a decade on from the 9/11 attacks on the US.

It appears that those who have been worried about the state of the world, whether it is due to fears about the inflationary impact of central bank money printing (aka quantitative easing); the less-than-springlike “Arab Spring”, worries about Iran's nuclear ambitions, or the eurozone’s sorry plight over Greece and Cyprus, have maybe become a little less worried. (Some of all these fears have also been priced in to the gold market for many months now.) And it is also possible that the impact of some central bank money printing, combined with other factors, has helped keep the US economy on a slow, but upward curve, also helping the dollar versus other currencies. With the US economy seen to be emerging from the post-2008 torpor some way ahead of Europe and Japan, the relative value in yield terms in holding dollars looks attractive. And as gold is priced in Greenbacks, a higher exchange rate for the dollar tends to be negative for gold and vice versa. (The same thing happens with crude oil prices priced in dollars.)

Gold prices have been strong for a number of reasons over the past few years and it is possible that some of these factors have lost some, if not all, of their potency, at least for the moment, Adrian Ash, head of research at BullionVault, a firm providing trading platforms for individuals to trade physical gold, told this publication.

“Gold was driven higher by a period of poor, or even negative, returns from asset classes such as equities, bonds and cash. In the case of cash, negative real rates have encouraged a move to gold and other select commodities. The worries about QE and the state of the public finances in many nations had encouraged gold buying in the late Noughties,” Ash said.

A key level for gold in dollar terms has been the $1,525 level, which has been tested a number of times on the downside, he said. The break below that level was important for traders who watch technical charts of market behaviour, he said.

Some of the reasons for buying gold may be fading for some buyers, Ash said. "There is an element of how a lot of fund managers have got bored of the narrative of the financial crisis,” he said. For example, the S&P 500 stock index has hit a record high; the Cypriot crisis has not - perhaps surprisingly - caused serious eurozone contagion – at least not yet. Goldman Sachs recently wrote a client note suggesting people go short, and Citigroup has also issued some downbeat comments. The EU Commission has recommended Cyprus sell some gold holdings.

In the futures and related markets for gold, net long positions have come down, Ash said, thanks primarily to a large increase in the size of bearish bets.

Despite such developments, however, it is highly unlikely that advocates of gold as a safety-first asset will be deterred from advocating its merits within portfolios. Indeed, some private investors may be using the developments to add towards, rather than subtract from, their gold holdings. With Japan now joining in the process of aggressive monetary easing and other economic and geopolitical issues far from resolved, gold is likely to be a significant asset for the wealth management industry for quite some time to come. The "barbarous relic" is not going away.