miércoles, 29 de julio de 2015

miércoles, julio 29, 2015

July 24, 2015 7:18 pm

Gold: Flight from safety

Henry Sanderson, David Sheppard and Neil Hume

It is a traditional safe haven, so why have investors fallen out of love with the precious metal?
 
 
Gold investors had high hopes for China, believing not only that its emerging middle class would be big buyers of the precious metal, but that the emerging superpower was quietly stockpiling its own version of Fort Knox in the vaults of the People’s Bank of China in Beijing.

But an announcement last week shattered that illusion. China’s central bank had bought only 604 tonnes of gold over the past six years — a sizeable chunk but nothing like the predictions of at least three times that amount that had been believed by many in the market.

The revelation that the amount of gold China’s slowing economy holds had actually fallen relative to its foreign reserves triggered an aggressive sell-off when markets reopened on Monday. For the pension funds, university endowments and savers who have all bought the metal in the past decade, as prices marched towards $2,000 a troy ounce in 2011, it may have been the moment when gold finally lost its charm.

In a matter of minutes almost $1.7bn worth of the precious metal was dumped after electronic and physical exchanges opened in New York and Shanghai, driving gold to a five-year low approaching the psychologically important level of $1,000 a troy ounce after months of trading in a relatively narrow band. Short-sellers, traders said, were trying to force increasingly nervous investors to capitulate.
 
“They’re basically saying we don’t believe the buyers can come out and defend their position,” said Joe Wickwire, manager of the Fidelity Select Gold Portfolio. “[They’re saying] we’re going to spook the market.”

That sinking feeling

The attack was well timed. Gold has been on the slide for several years. After hitting a record $1,920 in 2011 it has now slipped by 40 per cent. Half the gains it accrued between 1999, when the rally started at just $250 an ounce, have now been wiped out. This year should — by some accounts — have been good for gold. But despite the sort of bad news that would typically boost gold, including the Greek crisis, there has been little interest in what is supposed to be the ultimate haven investment.

“Gold has been the dog that did not bark,” says Matthew Turner, analyst at Macquarie in London. “It has always had a dual nature as a currency and a commodity. [But] at present it is not desired in either form.”

Investors have instead looked to the US dollar and Treasuries as safe places to park cash, driving the dollar to its highest level in 12 years.
 
After Monday’s sell-off, gold did not bounce back, eventually slipping at one point on Friday to a five-and-a-half-year low of $1,077. Traders are now questioning whether gold could fall back into triple digits for the first time this decade. An increase in US interest rates could sap demand for the metal as it increases the so-called “opportunity cost” of holding a non-yielding shiny rock. Goldman Sachs, one of the most influential banks in commodity trading, cautioned this week that it expected gold to fall to below $1,000 a troy ounce. Frederic Panizzutti, rated the most accurate forecaster last year by London’s bullion market association, estimates it will bottom at $950.
 

Others believe it will fall further. “As the Fed leads the way back towards normality, the gold price might return to levels of about $850 seen at the end of 2007 before the global financial crisis,” says Julian Jessop at Capital Economics.
 
For savers and investors who bought gold, the metal’s promise as a safe haven looks tarnished. But for the gold mining industry the decline looks even bleaker: it threatens its very existence.

“There’s enormous pressure on the industry at these gold prices to deal with this now,” says Mark Bristow, chief executive of FTSE 100 gold miner Randgold Resources. “The industry has not been profitable for a while.”
 
The start of gold’s 12-year rally can be traced to a sale. Gordon Brown, the then newly installed UK chancellor of the exchequer, decided in 1998 to sell more than half of the country’s gold reserves. The metal had averaged less than $370 a troy ounce since the start of the decade and Mr Brown saw an opportunity to raise much-needed cash to fund the newly elected centre-left government. He was following the lead of other central banks who had been sellers of gold.

The UK chancellor soon had reason to regret his move. At the start of the new decade a series of events helped trigger a multiyear rally. European central banks agreed to cap gold sales. The September 11 attacks set off a new era of heightened uncertainty in the world. And the enormous population of China underwent rapid industrialisation.

By the end of 2006, with the US running a large deficit to fund conflicts in Afghanistan and Iraq, gold prices had almost tripled to $750 a troy ounce. The following year it broke through $1,000 for the first time ever, rising 30 per cent that year as the opening stages of the financial crisis unfolded. Gains averaged 15 per cent over the next four years until in 2011, buoyed further by the eurozone crisis and Arab Spring, the metal hit a record $1,920.

Gold price

Hundreds of thousands of small investors had bought into the metal through the rise of so-called Exchange Traded Funds, which let a new breed of traders buy and sell small amounts of the metal.

John Paulson, the hedge fund manager who made billions predicting the US housing crash, decided to denominate a large chunk of his assets in gold rather than dollars, making him one of the world’s largest owners of bullion. He argued that central banks’ decision to engage in quantitative easing, or “money printing”, would ultimately lead to the debasement of paper currencies and trigger Weimar-style inflation.

But the idea that bullion would keep on rising proved false. With the $2,000 level in sight, gold suddenly stalled. Then it fell by $400 in little over a week in April 2013, the kind of move that would normally play out over a year, after Mario Draghi, the European Central Bank president, said he would do whatever it took to defend the euro. Traders initially said profit-taking was to be expected, but the market has never fully recovered. For the past two years it has settled into a relatively narrow range from $1,150 to $1,400, before this week when it dropped towards $1,000 for the first time since 2009.

Finding the bottom

Predicting where the gold price might bottom is difficult, says George Cheveley, a portfolio manager at Investec Asset Management. This is because gold is not like metals such as copper and zinc, which have industrial uses.

“With other metals you can talk about production costs and fundamental demand. When it comes to gold it is a bit like a currency or a share — it is investor led. And that means it can overshoot,” says Mr Cheveley who runs the $220m Investec Global gold fund.
.

Gold bugs are, however, finding reasons to be positive. China, they believe, is not being truthful about how much gold it has bought because it wants to drive down the price and add to its reserves on the cheap. Some observers estimate its real reserves are closer to those of Germany at 3,400 tonnes and not the official number of 1,658 tonnes.

“The bears have bitten on gold like a horse with a bit,” says Peter Schiff, who runs Euro Pacific Capital, an investment fund that specialises in attracting money from those betting that the US dollar will collapse. “Once people perceive that the dollar is more flawed than the yen or the euro, or any of the other currencies then where else can you go but gold. Gold will shine again.”

The World Gold Council, the industry’s lobby group, rushed out a statement after the sell-off that claimed Chinese retail demand was still in “good health” and the growth trend intact.

But the evidence on the ground is less conclusive. The country’s stock market rally has tied up a lot of investors’ cash.

Chart that tells a story — Gold


The price of gold hit a five-year low of $1,088 a troy ounce on 20 July, falling 4 per cent in just a few minutes after the Shanghai gold exchange opened. The immediate cause of the drop was a surprise five-tonne sell order placed on the exchange by traders overnight.
 
“Over the past year, our physical gold sales in branches have not been very good,” says an employee at one of China’s largest state-owned banks in Shanghai, who asked to be called Mr Chen. “Gold prices had a big fall, no aunties have come to buy,” he adds, referring to the middle-aged women who were big buyers when the price last posted a big fall in 2013.

But the gold bugs are not for turning: Texas-based former stockbroker Bill Holter believes it remains a buying opportunity.

“I can calculate on the back of a napkin that China is buying more gold,” says Mr Holter, adding that import data supports his view. He also believes that gold will have its moment again when the world’s current build up of debt pops.

“Mathematically it’s guaranteed to happen, it is just a question of when,” he says. “You cannot try to time gold. You just buy it and close your eyes and you know time is on your side.”


Additional reporting Ma Nan in Shanghai and Owen Guo in Beijing.

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