28th May 2014 by Adrian Ash
A little fun with the gold price at last, after 6 weeks of deathly dull action. With both London and New York returning from long holiday weekends, Tuesday’s volume in Comex gold futures jumped near 1-year highs, and not a moment too soon for traders about to slip into a coma.
Gold prices dropped 2.0% against the Dollar, marking the third sharpest 1-day drop of 2014 so far. Technical analysts will tell you this move was to be expected, pointing at gold’s converging triangle of lower highs and flattened lows. Indeed, gold had been trading in a tight $40 per ounce range for over a month. Even with Tuesday’s drop, May will have seen perhaps the narrowest trading range since August 2009 on Reuters’ data.
Low volatility signals complacency and so breeds risk, as The Economist claimed last week. But other factors cited for gold’s long slumber include the broad flattening of price action across all financial markets (the VIX volatility index of S&P options is at March 2013 lows), plus the collapse in trading volumes perhaps sparked by heavy regulatory interest in key price points such as the London 4pm FX fixes and, of course, the London Gold Fix. Because where traders fear to game or bet on a price mechanism, the thinking runs, the loss of activity might see the hot money back away entirely from that market.
Fact is, however, gold’s boring price action has in fact seen the metal holding strong given the good news weighing against it. Better US data only add to new highs in world stockmarkets. China’s Yuan is flirting with 2.5-year lows to the Dollar, meaning weaker purchasing power for gold’s biggest buyers. The Ukraine crisis has failed to hit financial markets. So lots of people think gold is, somehow, no longer a “safe haven”. Deutsche Bank analysts, for instance, say that Tuesday’s drop to 3.5-month lows”surely dashed any remaining conviction among gold optimists that it provides any haven from geo-political turbulence.” That is to misread the awful Ukraine news, as well as the growing sabre-rattling in Asia or the anti-Europe vote in the EU elections. Because people buy gold (and futures traders back gold prices to rise) when other asset classes get hit. Absent a rise in financial stress, howsoever it’s caused, no one should be surprised that gold prices remain boring, if soft.
Does that in any way undermine gold’s appeal as investment insurance? BullionVault users certainly don’t think so. As a group they found cheaper gold a strong buy on Tuesday, with gold’s sudden drop bringing out the heaviest trading – and the strongest net buying on our physical gold and silver exchange – since mid-March. Professional money managers wanting exposure to cash prices also bought gold’s drop on Tuesday. The giant SPDR Gold Trust (ticker: GLD) grew by 8 tonnes from Friday’s new 5.5-year low of 776 tonnes. That’s the biggest addition to the top ETF by weight since October 2012, and the largest addition as a percentage of existing holdings since August 2011.
Take note, however: This demand looks a mini-replay of Spring 2013’s crash. Only mini, and with a handful of Western investors taking the role of Asian consumers. Because it didn’t drive prices back up. Quite plainly, Tuesday’s buying was bargain-hunting, and that isn’t bullish by itself. Daily volatility meanwhile remains quiet, holding near March’s 12-month lows and meaning that daily price swings are almost as shallow, percentage-wise, as they were before gold’s 25% crash of spring last year.
So it’s no wonder the very boring Central Bank Gold Agreement got so much attention last week, nor that this week’s little pop in volatility captured a few headlines. Because there’s been nothing going on with price, or the urgency of investing, since midsummer 2013.
As it is, the giant GLD ETF trust fund stands a long way off its record-high holdings of end-2012. Fully 40% off in fact, at the lowest levels since December 2008. But that is as it should be. Because the sense of financial crisis has retreated, and keeps receding. So buying gold is very much less urgent for the mass of money managers and private Western households.
Down at these levels, however, buying gold is clearly urgent for long-term investors wanting insurance. Whether or not gold recovers its recent tedious action, these look like knock-down prices compared to the financial crisis peaks of 2010-2012.