Gold plunge not met by stronger physical demand

Spot market gold fell to its lowest level since August 2010 Wednesday, trading as low as $1,224 an ounce, as stocks rallied along with the dollar following better-than-expected U.S. economic data a day earlier.

By Wednesday lunchtime in London, gold in dollars was trading around 4% down on where it started yesterday's London session.

The euro gold price also hit a fresh three-year low this morning, dipping below €940 an ounce, as did gold in Sterling which traded as low as £797 an ounce.

In contrast with April's price drop, gold's recent fall has not been met with a surge in demand for physical bullion, Asian dealers report.

"We have not seen a substantial increase in demand," agrees Victor Thianpiriya, commodities analyst at ANZ Bank. "We are going through a whole bunch of stop losses...the liquidity issue in China is also hurting sentiment," he adds, referring to the recent spike in short-term interbank borrowing rates in Shanghai, which saw China's central bank yesterday step in with short-term lending to keep interest rates at a "reasonable level".

The world's largest gold exchange traded fund SPDR Gold Trust (ticker: GLD) saw outflows totaling 16.2 tonnes of bullion yesterday, taking total holdings down to their lowest level since February 2009 at 969.5 tonnes.

"This is a seriously large daily decrease and shows the general lack of demand for gold as an investment tool at the moment," says David Govett, head of precious metals at brokerage Marex Spectron. "All in all, these are not happy times for the precious metals markets and for the time being I remain happy to sell rallies."

"There has been 550 tonnes of gold sold out of ETFs since mid-February," adds Bernard Dahdah, precious metals analyst at Natixis. "That's the equivalent of saying we've added to the gold market an additional 11% on top of 2012's gold [mining] output."

On the currency markets, the euro fell to a three-week low against the dollar this morning, with the U.S. currency strengthening following the release of positive economic data yesterday.

European stock markets meantime extended yesterday's gains during Wednesday morning's trading, following gains a day earlier for U.S. markets following better-than-expected data on U.S. durable goods orders, home prices and consumer confidence.

"The first leg of the correction [in stocks] is close to over and the markets should be more stable going into month end," says Jean-Paul Jeckelmann, chief investment officer at Banque Bonhote & Cie. in Neuchatel, Switzerland.  "The Chinese central bank's liquidity pledge has calmed markets in the short term, but the picture is not that clear in the medium term."

Silver meantime dipped below $18.50 an ounce this morning, as with gold its lowest level since August 2010.

Over in India, the world's biggest source of private gold demand, jewelry maker Rajesh Exports said Wednesday it expects its sales and earnings to grow 10% during the current financial year. This is below previous expectations, with the dip the result of India's recently introduced measures aimed at curbing gold imports, such as raising the import duty to 8% and restricting importation on credit.

Rajesh Exports added however that it does not plan to suspend sales of gold bars and coins, despite a request from the All India Gems & Jewellery Trade Federation.

"We don't feel stopping these sales would solve the problem [of India's high level of gold imports]," the firm's chairman Rajesh Mehta tells Reuters. "If genuine people stop the sale then all other spurious people will come into the market."

About the Author
Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVaultBen Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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