Market Memo: Goodbye, gold
There’s no question the philosophical argument for gold is the strongest it’s been in decades. With the Bank of Japan joining in, global quantitative easing is in full swing, putting the world on the brink of a potential currency war. Yet after a 12-year secular-bull run, the metal’s price action of late seems to favor the bear and not the bull.
Why? Likely because gold is nothing more than the corollary of what has been occurring in equities, where risk appetite continues to rise as tail risks recede and the fundamental global picture brightens. JP Morgan notes the whole market access debate in Europe isn’t being fought any longer, that central bank activities haven’t sparked an inflation surge and that while growth in China certainly isn’t very robust, the “hard landing” worries haven’t materialized.
Why do we own gold in the first place? As a hedge against inflation, but inflation fears seem premature. As a way to protect against deflation, but with all the printing of money, it’s difficult to envision this becoming an issue anytime soon. As a haven during crises, but the fear trade is evaporating. So we’ve gotten away from the forces that helped gold jump from $800 a troy ounce in 2008 to more than $1,900 in the fall of 2011.
As a precious metal, gold also is facing the same pressures other commodities are facing amid this period of global malaise, with just enough growth to forestall recession but not enough to spark outsized demand. Deutsche Bank observes that the entire commodities complex continues to decouple from equities, with some of the most notable moves down coming from gold.
There’s been a technical breakdown, as well. Gold lost 13% of its value in just two trading days this past week, suffering its biggest one-day drop in 33 years on Monday alone. Putting a large block of gold up for sale would normally result in a number of orders phased in over time, but the Institutional Strategist says this did not happen this past Friday or Monday. Instead, someone was in a hurry to sell, either because their liquidating sale was forced or they in fact wanted the price lower so they could cover a position at lower levels or make deliveries after the market shook loose supply. The selling looked forced and aggressive on Friday. And Monday, trading reeked of margin calls, i.e., forced selling.
The SPDR Gold Shares exchange-traded fund represents both an inexpensive way to invest in gold and a form of leverage. At the end of March, it had a market capitalization of $24.8 billion and institutional ownership of 46.6%—larger that 72% of the S&P 500 issues. This leverage, Dudack Research notes, translates into volatility that, coupled with margin calls, helps to explain the unusually weak action in gold recently. There is room for a sharp near-term rebound, Dudack says, but gold is likely to trade in a wide volatile range of $1,200 to $1,600 for much of 2013. The reason is simple: Many of the basic tenets that have supported gold are fading, taking the shine for investors with it.