On Friday, the price of an ounce of solid gold tanked below $1,550 per ounce, to an 11-month low of $1,549.57 per ounce, prompting a section of analysts to suggest the end of the golden era for the yellow metal.
It recovered about $30 or so after the market officially closed for the weekend and an ounce of gold was last seen changing hands for $1,581.30 on Saturday afternoon.
But does that 2 per cent recovery mean all’s well with gold?
Not even close.
For the first time since 2001, the price of gold has seen losses for two consecutive quarters. That’s the definition of being in technical recession – down for two consecutive quarters. Gold price is now down 6 per cent in 2013 (rose just 7 per cent in the whole of 2012).
This means that, at least over the past 15 months, it has offered meaner returns than a decent fixed deposit account.
Indeed, gold is within shouting distance of being officially in a bear market, which it will be when (not if) it falls 20 per cent below the $1,920/oz all-time high that it made in September 2011. For that, the price of gold will need to go down to $1/536/oz or below.
With the kind of volatility and downward pressure witnessed in gold price of late, that might happen before my next paycheque becomes due.
To be fair, gold has made a remarkable journey over the past couple of decades. In fact, the past 10 years have seen gold climb from $320/oz in 2003 to $1,920/oz in September 2011 to the current levels of around $1,575/oz.
But in the world of finance, anything that goes up must come down. And it seems that reality is catching up with gold.
For one, the rest of the financial world, which was witnessing tsunami after tsunami even as the island of gold was getting greener, is now heading back on track, very gradually though.
But as any smart investor worth his dime will know, you can only make serious money if you start at the beginning of a rising wave, and cash out near the top.
Equity markets are at the beginning of that wave, and gold is on the top, and falling. So gold investors – the not-so-loyal but still smart ones – are cashing out their bullion bars and trading them in for stocks in stabilising as well emerging markets.
This trend, once it catches up in the right earnest, will only result in gold continuing to decline, and the decline will get only steeper as more investors jump off the golden bandwagon and off to more ‘riskier’ assets.
Indeed, with the recent volatility, gold has ceased to be the safe haven investment, which was its USP and acted as a magnet for countless investors. With such investors giving gold investment a second, doubtful thought, gold has lost a lot of its ‘safe’ gloss.
Moreover, the infamous US quantitative easing program (which has been mimicked by a number of other countries that either peg their currencies with the dollar or loosely track the US fiscal policy) is going to end – sooner than later.
The US Federal Reserve has looked for and found unique ways of printing additional money. Indeed, it has poured more than $3 trillion of easy money into the US in the past 51 months since December 2008, when the first round of quantitative easing program was unleashed.
A good percentage of this endless printing of money found its way into gold ETFs and the likes. In less than 5 years, that $85 billion a month additional money has almost doubled gold price from $837/oz.
The drying up of this dollar river will only be negative for gold price, with analysts suggesting a rollback in prices to the pre-QE era.
Paper gold (a.k.a exchange traded funds, or ETFs) has been primary catalyst in pushing up the prices of the yellow metal. It’s what made it possible for retail investors across the world to buy up as little as 1 gram of gold without the risk and cost of holding on to physical gold, and offering the flexibility of trading it like a typical share.
Gold ETFs were introduced in March 2003, when gold price was hovering around $330/oz. Gold has since rallied by 385 per cent, and 45 gold ETFs have sprung up across the globe.
The convenience offered by ETFs – of entering into the market in small or big denominations, risk-free storage, and the freedom to exit at will – is what is now being blamed for what some forecasters reckon will be a record plunge in record time.
In fact, in the first quarter of 2013, gold ETFs experienced record outflows. According to Reuters, which tracks eight gold-backed exchange traded products (ETPs), funds suffered their biggest ever outflows this quarter, falling by 7.2 per cent from the start of the year to 70.66 million ounces.
With equities rising – and expected to continue doing so in the foreseeable future – investors have been busy swapping their ETFs and gold bars for shares and other tradable securities.
Indeed, the future of bullion looks bleak.
Unless, of course, the two Koreas actually go to war.
