by Conventional wisdom says that gold is a ‘safe haven’, an asset to which investors flock when chaos threatens financial markets. Over much of the past century, it has served as a store of value. Those days may be over. Despite several such potential negative events in recent months, investors have wanted nothing to do with the yellow metal. June and July featured exactly the kind of events that would have driven gold prices higher in the past – the Chinese stock market fell sharply and Greece came within inches of exiting the euro zone. But even the two of them combined didn’t have the usual effect. On July 8, when Chinese stocks touched a new low and Greek politicians were rushing to meet a deadline critical to a deal with their European creditors, gold was down 3 percent from the beginning of June. The yellow metal has fallen further since. At ,092 an ounce, it is down 8.5 percent since the beginning of June and 9.5 percent from the beginning of the year. The price of gold entered risky territory on July 16, when it slipped below ,140 an ounce, the lower end of a long-held trading range. Stefan Graber, Credit Suisse’s Head of Alternative Investment Strategy, points out that there were a large number of open put options with strike prices between ,000 and ,400 per ounce.
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Conventional wisdom says that gold is a ‘safe haven’, an asset to which investors flock when chaos threatens financial markets. Over much of the past century, it has served as a store of value. Those days may be over. Despite several such potential negative events in recent months, investors have wanted nothing to do with the yellow metal.
June and July featured exactly the kind of events that would have driven gold prices higher in the past – the Chinese stock market fell sharply and Greece came within inches of exiting the euro zone. But even the two of them combined didn’t have the usual effect. On July 8, when Chinese stocks touched a new low and Greek politicians were rushing to meet a deadline critical to a deal with their European creditors, gold was down 3 percent from the beginning of June. The yellow metal has fallen further since. At $1,092 an ounce, it is down 8.5 percent since the beginning of June and 9.5 percent from the beginning of the year.
The price of gold entered risky territory on July 16, when it slipped below $1,140 an ounce, the lower end of a long-held trading range. Stefan Graber, Credit Suisse’s Head of Alternative Investment Strategy, points out that there were a large number of open put options with strike prices between $1,000 and $1,400 per ounce. Many investors who had bought puts to limit their downside exposure to gold, the price of which had been falling gradually since the beginning of the year, exercised their options during the slide.
Then, on July 17, China’s central bankers announced that they had been buying less gold than many market participants believed – about 100 tons a year – over the last six years. Many market participants had believed that China was hoarding vast quantities of gold, and that the precious metal was key to its reserves diversification strategy. But when the country’s actual gold holdings turned out to be smaller than expected, it became clear that gold isn’t quite as critical to Chinese central bankers as many had believed. That news dampened expectations about how much gold the central bank might buy in the future, and likely helped trigger a steep slide that began on July 17 and troughed with a closing price at $1,080, a low for the year, on July 23. Graber believes the sharp decline triggered technical selling not only among those holding gold options, but also by investors who had placed stop-loss orders when buying exchange-traded funds that track the price of gold.
China’s isn’t the only central bank investors are concerned about. As the dollar has strengthened this year, central bankers in emerging markets have been using their foreign exchange reserves to prop up their currencies. While under normal circumstances officials might be buying a broad range of assets, including gold, they’re now focused on selling their reserves (mostly dollars) and buying local currency instead.
The price of gold should come under even more pressure when the Federal Reserve raises interest rates, a move Credit Suisse expects in September. Rising rates should lend further strength to the dollar, intensifying pressure on emerging market currencies. In addition, gold loses its luster when interest rates rise, since it doesn’t bear interest. With inflation expected to remain relatively subdued in developed economies over the next year, there isn’t likely to be much demand for gold as an inflation hedge, either.
The physical gold markets in India and China ‒ another very big driver of global demand — have also been sluggish recently. Indian gold imports, though higher in the first half of this year than in 2014, are about 200 tons below the record-setting pace of 2011. In order to narrow the country’s current account deficit, the Indian government has implemented a number of programs over the past year to curb gold imports, such as raising import duties to 10 percent. Policymakers have also introduced gold-linked bonds and interest-bearing bank accounts for physical gold deposits, hoping that Indian families will turn to “paper gold” as a store of value, thus freeing up actual gold to meet domestic demand. Meanwhile, in China, the ongoing anti-corruption campaign helped reduce demand for physical gold 20 percent in the first quarter of 2015 compared to the two previous years, Graber says.
While the price of gold is less dependent on supply than other metals, since most of the gold ever mined still exists in some form, a sharp drop in mining production could conceivably put upward pressure on the price of the metal. But, so far, miners haven’t cut production – in fact, says Graber, they’ve ramped up. That’s partly because falling input costs have helped cushion the blow of lower prices. The cost of fuel and mining equipment has declined, while currencies in many of the world’s largest producer countries (China, Russia, Australia, South Africa, and Canada) have depreciated in recent months, reducing labor costs relative to gold’s price, which is quoted in US dollars. Besides, falling prices haven’t yet made gold production unprofitable. Although industry cash costs vary widely, the average is estimated at $750 per ounce. Sorry, gold bugs – for now, there seems to be precious little hope of prices moving higher anytime soon.