Hope and expectations are running high for some clear and effective policies coming from the Jackson Hole meeting starting tomorrow. And that hope has effectively wiped 12% off the gold price – that is to say that a large part of the "fear premium" has now been taken out of the price and much of what remains is down to good old-fashioned supply/demand fundamentals. I'll explain.
Gold prices have been rising at a compound 16.8% per annum since the bull run began 11 years ago from a base of $255/oz. That price rally can be attributed to a change in fundamentals – flat gold mine production and a huge rise in investor demand (thanks primarily at the advent of the ETF) which has more than offset a decline in jewelry demand. This, coupled with central bankers turning from large net sellers to net buyers, plus miners unwinding of their hedge books and 'hey presto' – you have a solid, sustainable and long term bull run.
That steady bull run has been augmented over the last 3 years by gold's other role which relates its supra-commodity role as a safe haven during times of great economic uncertainty and even systemic risk; the rate of price increase has accelerated since 2008 to 20.3% – the extra 3.5% compound could possibly be attributed to the so-called "fear factor" or safe haven role of gold. These assumptions being so, then removing that fear element in expectation of some positive noises from Bernanke would take us back to $1,720 – exactly the current market price. In short, the fear premium has been removed without a shot even being fired from Jackson Hole. Quite a win.
I have never been a fan of conspiracy theories, but I do wonder about the manner and timing of the sell-off. Much of the selling was conducted through the London p.m. fixing (when New York was active) which is a favored route for official (central bank) selling rather than being finessed into the market as a fund might prefer. It was, if you like, a statement – and quite a handy and effective one just in advance of the Jackson Hole meeting.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.