Should you sell gold even if the rest of the world is?

The number of news articles on gold has more than doubled in the past two days as the U.S. Comex gold futures plunged 4.06% last Friday and fell even more spectacularly on Monday by 9.3%4. The Monday's percentage fall was the largest since 1983. The gold futures traded at a record high of 751,058 contracts at the CME. On Tuesday in New York, the gold futures rebounded 1.93% to end at $1,387.40 although they reached $1,404.20 at one point. The CRB Commodities index dropped 2.19% on Monday, the largest percentage drop since 14 December, 2011. The S&P 500 index rebounded 1.43% on Tuesday after selling off 2.30% on Monday while the Euro Stoxx 50 index fell in the past three consecutive days by 2.43%. The Dollar Index went up slightly by 0.13% on Monday, but dropped 0.81% on Tuesday as the Euro/Dollar surged 1.08%.

What Has Happened?

Market analysts have offered the following reasons for the "unexpected" plunge in the gold prices. The equity markets and the broader commodities have reacted negatively to China's 7.7% year-over-year Q1 GDP figure compared to the median Bloomberg forecast of 8%. Last week, the news that Cyprus might sell 10.4 tonnes of its gold holdings has triggered the fear that the other European sovereigns would sell a higher amount to raise funds. The market also believes that the chance of a "tail-risk" event has been significantly reduced with the ECB, the Fed and now the BOJ taking some actions to boost economic recovery and prevent the worse-case economic scenarios. This has prompted some shifting of money from the defensive assets such as gold back into equities although the recent weakness in the U.S. data has prompted some movements back into the U.S. Treasuries, a traditional safe haven. Global gold-backed ETF holdings have declined about 9.5% this year. The important support level at $1,540 has also been broken. When gold price breached $1,430, the selling became indiscriminate. Given that the longer-term supportive fundamentals for gold have not changed in just three days, a stronger argument for the vicious sell-off is the short-selling by funds and dealers. Our CEO Ross Norman pointed out that the selling of 400 tonnes was timed to get the maximum impact especially with the sentiment toward gold already being weak.

What Can We Expect from Here?

The CME has subsequently raised the margin for gold by 19% which will likely dampen the speculators' interests to short more. However, some funds may look to sell further to reduce risks. The Chinese and Japanese retail investors have been seen to scoop up the cheaper gold. The central banks including Sri Lanka and Korea still look to add gold on a longer-term basis. The North-American gold miners may need to cut back on spending and exploration if their all-in-cost level of $1,300 is breached. While a trading range will take time to be re-established and the physical buyers will re-assess carefully before buying, the gold market will likely find a level where the longer-run fundamentals will re-assert themselves in the next few months.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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