Revaluing Gold as the Safe-Haven

The mess of gold price leaded by Japan

Why Gold price Declined ?

All the gold investors are trying to understand what happened in the last couple of weeks in the gold market. As April 11th, gold prices started a sharp decline, from $1560 to $1450 and touching a bottom of $1350 in April 15th. The problem is there is no apparent reason for such decline, the world economies haven’t recovered yet and shadows of global political tension in the far-east, middle-east and Europe and inflation rates are rising. These factors should help the gold bull to have a second run, but it’s not. It seems gold selling is the trend in the market.

On the other hand, “gold bugs” numbers are increasing after the last bull-run and the current state of the world economy, plus the increasing common awareness of gold value as an asset verses other safe-haven assets such as bonds. Also, there is the growing number of bargain hunters turning their eyes onto the gold market and entering the fray after it showed an outstanding performance since 2008.

It is not surprising that the gold prices are falling, as gold has showed signs of entering a down-trend in February. And yes, there were ups and downs and uncertainty of this was the beginning of the end of the long bull-run or not. But still, the main trend was one heading downwards. What is surprising is the last week fast dip. What is going on?

Reasons Behind Gold Fluctuating Price

It is so early to determine what’s wrong, and whether is this the first wave of more declining like the wave happened in the 1980s, or it is a short-term setback and rest for the bull to continue a second round backed by the gap of the increasing demand for gold and other commodities and a shortage on the supply to cover this increase.

If there is any answer to what’s happening in the gold market, it should be only one: gold is no longer the ultimate safe heaven, at least there are doubts starting to raise about it now. The price of gold is determined by one of the most complex network of economic factors such as the supply and demand, the currency value and the market sentiment. Therefore, it can face sudden price swings the same as bonds and equities may face.

The reason behind the current volatility of gold prices is the way we buy the gold. In other words, the popularity of gold ETFs, which is gold traded the same as shares, helped the last boost in the gold prices, and also maybe the reason it’s a reason behind the last decline in gold prices. ETFs are a low-cost and easier way for investors to track indices, commodities and currency value. That made a popular way to trade gold in the last 10 years.

What the Experts Say

Analysts such as Jason Hollands, managing director of Bestinvest, and others said that since the ETFs are cheaper than bullions and traded easily in the same manner as shares, plus being more accurate than gold mining shares in tracking gold prices made it popular in the last decade, especially by private investors. Speculators, hedge fund managers and traders entered this market, and many bailed out with automated sales on the first signs of any movement they didn’t expected, which triggers more selling and more decline in price. For instance, 9 billion pounds exited the gold ETF market from January till March this year.

Meanwhile, Richard Davis, managing director of BlackRock’s Natural Resources equity team, said that due to the change in the relation between the prices of gold ETFs and that of gold bullions and the performance of gold mining shares, a new opportunity arises. For instance, if the gold prices rise and the gap between ETFs and bullions narrowed, those who focus on trading gold will have greater returns. And vice versa, the losses will be greater for those who focus on gold such as the mining companies.

Other Sayings

This last declined raised doubts and questions whether the government or the big-boys have something to do with manipulating the market. Reuters reported that such a fall happens once every 200 years. Supported by the lack of clear-cut evidence on an external factor to cause this decline, conspiracy theory began to roam the internet. Rumors started to spread about governments caused this fall to support the dollar and or preventing major banks from bankrupting.

This may be an interesting news story. Still, there is no evidence on or against such claims. So, there is no apparent reason for the current change in the gold prices. Yet, that’s how the markets work, it change in unpredicted ways and sometimes it doesn’t make sense. That’s why we still spend money on R&D to find ways to understand these changes and predict them beforehand. The gold market is no exception even though its one the oldest markets and the most mature.

Another Saying

As said before, the supply and demand are two of the top factors behind the change in gold prices, a dramatic change in any of these should probably cause a price swing. The supply is more or less, stable, yet it’s sensitive to the geo-political tensions and it may be manipulated politically. On the other hand, the demand on gold is mainly from Asia specially the world’s number one gold consumer, India, beside central banks looking to stash reserves, and investors buying gold as currency hedge. Which means that gold prices are more dependent on the physical demand than gold ETFs. The share-like nature of gold ETFs made it more volatile and more exposed to selling than gold bullions that maintained a relative stability compared to shares, ETFs and bonds.

What happened in the last couple of weeks was exactly the OPPOSITE; sales increased in gold ETFs and it also surged in gold bullion market. Selling gold in both forms of ETFs and bullions was the direct cause of the drip in gold prices . But what caused this selloff ? Analysts and traders alike are still looking for answers.

Having what happened in Cyprus recently, from taxing deposit accounts to the general crashing of the economy, should make the prices of gold go higher, but it didn’t. Moreover, the opposite might happen if the rumor of Cyprus Central Bank selling some of their reserved gold to cover debts. This will lead Italy, Spain, Greece, Slovenia, Hungry, Portugal and other countries having similar financial crisis to do the same and initiating a domino effect around the world. If that happens, another major drop in the gold prices even further might occur. This piece of news about Cyprus alone made the prices of gold fall like a rock in a couple of days and still struggling to go back to normal. Even after what Harris Georgiades, the Finance Minster in Cyprus, said about this is not a priority and other options are being studied.