Can We Hear A Popping Sound?

19/04/2013 at 4:46 pm

The gold market has been interesting again recently. Following a few months’ stately decline it suddenly collapsed over the weekend, losing more than $200 per ounce in the course of two days’ trading (prices here). It has bounced a little since but remains 20% down over the past six months. Now the gradual decline could be explained by reference to dollar weakness, but the spike down suggests something else.

Reuters has some interesting comments from Singapore overnight. Asian investors are at least as hooked on gold as are some of us in the west, and generally assumed to be keener buyers at a retail level. Here’s what a gold trader had to say:

Prices have suddenly jumped but I guess it’s because gold
has broken the $1,400-level again. Technically, people are just
buying up again …

This is from the global head of commodity strategy at ANZ:

A key factor to watch will be gold (exchange-traded fund)
ETF holdings, with a stabilisation in ETF holdings and then
fresh ETF buying to restore some of the lost confidence for
longer term gold investors.

The rest of the article waxes on about declining inflationary risks in the US and putative bullion sales by European central banks. As regular readers will know, the economic arguments used to explain the price behaviour of gold have always been utterly specious. The rally has been driven by sentiment – a heady mix of panic over the world at large and greed at the prospects for the supposed opportunity presented by gold ownership in particular.

So what is interesting about the discussion and coverage now is that the focus has shifted to this way of thinking. Note that the professionals comment on technically-driven trading and investor interest. This is what is getting the attention. Wise-sounding opinions on “fiat currency”, quantitative easing and so on are being displaced by the rather less elevated analysis of the commodity market’s real drivers: supply and demand.

Gold has always been a safe haven – in a sense. (It is, after all, a costly and highly volatile one.) Should funk set in again it might well reach the $2,000 or even $10,000-an-ounce levels being predicted for it with some confidence only 18 months ago.

Meanwhile, however, it would be consistent with growing confidence for investors to lose their appetite for gold as a haven asset. Perhaps what we are seeing is a buying opportunity, as is being advocated by some. Alternatively, this could be the early popping sound of a major bubble.

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