Gold beat stocks since Lehman, but price sinks as tapering looms

September 13, 2013 06:45 AM

The price of gold (COMEX:GCZ13) marked the fifth anniversary of Lehman Brothers' collapse by sliding $25 per ounce Friday morning, finally bouncing from a new five-week low at $1,305.

World stock markets held flat, while the price of crude oil rallied from a three-week low.

Silver regained 40c per ounce from a fresh four-week low at $21.42 – some 10% below where it ended last week.

Gold has now lost 6.2% vs. the dollar so far in September.

"Five years on [from Lehmans' bankruptcy] global finance is a long way from safe," says a lead editorial in this week's Economist magazine.

"The system is just as insane – perhaps more so," says the Financial Times' U.S. editor, Gillian Tett. Because "the big banks are bigger, shadow banking is taking over more activity, not less, [and stability] depends more than ever on investor faith in central banks."

Since the eve of Lehmans filing for Chapter 11, notes Tett's FT colleague James Mackintosh, U.S. stocks have averaged 7.8% real returns per year allowing for dividends and inflation.

That is "identical to the return in the five years up to June 2007, the month before the credit crunch hit," says the FT, and more than one percentage point above the US stock market's very long-term average.

Physical gold – net of all transaction and storage costs, as well as inflation – has returned 9.8% per year since the Lehmans collapse for US citizens buying, owning and selling today on BullionVault.

"For next year, a move to $1,000 is on the cards," reckons investment bank UBS commodities research chief in Singapore Dominic Schnider. "Once a timetable of tapering is known, then you probably will see a fresh selling wave of the exchange-traded fund side."

The quantity of gold held to back ETF shares in the giant SPDR Gold Trust was unchanged Thursday at 917 tonnes – nearly 50% greater by weight from September 2008, but one-third down from the peak holdings of December last year.

"We expect reduced tail risks and QE tapering expectations to continue to weigh on the gold market," said HSBC bank in a note Thursday.

"Gold's failure at the 1415/24 barrier," says a technical analysis from fellow London market-makers Credit Suisse, "leaves us still bearish.

"Key downside levels are at $1,277...beneath which triggers a move to [end-June's] $1,180 low."

Japan's Nikkei Shimbun meantime reported that Larry Summers will become the next chairman of the US Federal Reserve, quoting unnamed "sources".

Appointing the former Treasury secretary and Harvard professor would be opposed however, a leading Republican warned, because of his "history of promoting stimulus funding and higher taxes."

"Conservatives [will also] exploit looming fiscal deadlines," says a Reuters report, "to derail President Barack Obama's signature healthcare reform law."

Agreement to raise the so-called "debt ceiling" – now set at $16.7 trillion – must be reached by September 30 if Washington is to avoid what the newswire calls "an historic default on its debt that would create havoc in global financial markets."

"Uncertainties surrounding U.S. fiscal issues...have in the past been typically positive for gold," says UBS's precious metals team in London.

"Geopolitical issues, Eurozone and US debt/budget debates," agree analysts at Asian bank Nomura, " gold through the traditionally seasonally strong Q3."

India's legal gold imports – now curbed by 10% duties and strict central-bank rules – will likely fall 30% this year to $38 billion by value, economic adviser to the prime minister C.Rangarajan said today.

With investment gold trading 13% below August's record highs today in Rupee terms, "Some buyers are still on the sidelines expecting a further drop in prices," Reuters quotes a Mumbai dealer.

"Indian gold demand will recover in the months ahead," says commodities analysis from Standard Chartered Bank, "especially given expectations of rising farmers' incomes, after a bumper monsoon season."

But while StanChart expects Asian demand "to remain robust...we do not see much upside" for gold prices. "The global economic recovery is strengthening, which will deter safe-haven buying."

About the Author

Adrian Ash runs the research desk at BullionVault.