In last week’s report we said it wasn’t the right time to buy gold, and unfortunately that was spectacularly correct. Already on a downward trajectory, gold suddenly went into a rapid and alarming nose-dive early Monday morning; it lost over 4 percent of its value in the initial slide, then kept going down as the European and US markets progressively came into play. By the end of Monday it had hit a new five-year low of $1,086, and after a brief rally on Tuesday it started to slide again. Thursday saw another new low around $1,078 before, finally, it started to head up early Friday afternoon. When the markets closed it was trading at $1,099.50, putting it $33.30 down on the previous week. While losses over the period weren’t much more than the one before this is not looking good for the metal right now and further losses are likely.
So what pulled the rug from under gold like this? It wasn’t a surge in equity values; the Dow Jones had an even worse week than gold, falling consistently through the period for a total loss of over 500 points, while the FTSE 100 and other major exchanges followed a similar downward track. Oil prices also collapsed – WTI lost more than $2.50 to close at $48.14, and Brent slipped over $3 to $54.62. These prices are the lowest in over four months.
What’s actually happened is a combination of factors that, working together, have put gold under serious pressure. One of those is the continuing strength of the dollar. With the dollar index up by more than a fifth in the past twelve months gold is a lot more expensive for buyers outside the USA, which obviously makes it less attractive. Then there’s the ceasefire over the Greek debt crisis. It doesn’t look like any sustainable long-term solution has been found, but for now fears that the country will be ejected from the Eurozone have receded. In turn that eases worries about contagion, so Spanish, Italian and Portuguese bonds – which offer good returns right now – are displacing gold as an investment mechanism. It’s another swing of the old pendulum between security and earnings, and right now gold’s security doesn’t carry a premium.
Finally, and maybe most importantly, there’s China. The economy there has been slowing down, reducing demand, but that’s been partly compensated for by the government building up its bullion reserves. However the week before last the People’s Bank announced that its purchases had been a lot smaller than believed. China watchers had assessed the country’s reserves at around 3,500 tons; the latest official figures put them at a touch over 1,650. It’s possible those numbers are understated; China is preparing to join the IMF’s basket of currencies and wouldn’t want to shake up the market by announcing larger than expected reserves, but this step looks to have shaken it in the other direction.
Right now it looks as if gold could fall below $1,000 an ounce in the near future. This is obviously not a good time to sell, and buyers should be cautious too. There’s a great potential opportunity to stock up on cheap gold but that could backfire if there are more significant losses to come.
- Gold Market Update 7-19-2015
- Gold Market Update 8-2-2015