11th April 2014 by Adrian Ash
Highlights this week
How Gold Squeezed 1 Year’s Drop into 2-Day Crash
Gold rises for 12th week in 15 so far in 2014…
Silver struggles to catch up, drops vs. Sterling…
Nasdaq slumps, major bonds rise…
US Fed full of doubt on tapering or raising rates…
A year ago today, a leaked IMF-EU paper told Cyprus to sell a chunk of its tiny gold reserves. It never did. No Eurozone central bank has sold gold since France quit in 2009. But already advised that week to sell short by Goldman Sachs, the market took fright. The next morning, Friday 12 April, the gold price dived. By the 3pm London Fix, it stood at $1535 per ounce, the low from which gold had bounced 3 times since peaking above $1900 in September 2011.
Gold was hit a by a flood of stop-loss orders in Comex futures, sinking as New York closed for the weekend. And then on Monday 15 April the real trouble showed up.
Across 2013 as a whole, the price of gold lost 30%. The market squeezed nearly all that drop into the second quarter, and nearly half of that into just two trading days. What sparked the slump? In a word, boredom.
From the turn of the century gold prices rose 12 years running, delivering 14 times the total return on US stocks over that time. But after the Eurozone failed to collapse in late 2012, the financial crisis was looking tired. So was its proven antidote, especially after gold failed to make new highs on the US Fed’s “QE infinity”. Money-printing could now only slow down, and the new buzzword “tapering” suited the broader flip in gold sentiment.
Exchange-traded trust funds began 2013 vaulting almost a whole year’s gold mining supply, some 2,800 tonnes. Shedding 10% of those record-high holdings by end-March, ETF shareholders then dumped one fifth in the second quarter, with the same proportion dropped across the rest of the year. April’s rush for the exits dumped the equivalent of 10 months’ accumulation over the previous half-decade. Albeit perversely however, last year’s crash in fact proved gold’s insurance function, forcing through a sharp price drop to mirror the boom in world and particularly US equities, as this asset performance comparison table shows.
Today that boom is now being compared with the S&P’s bull market ending October 1987, and while many “scary charts” linking today with Black Monday look stretched, equity valuations are stretched further.
Gold’s two-day crash in April 2013 wasn’t its worst percentage fall (that was January 1980, just after its famous $850 top). But the FTSE-100 matched that 11% plunge in one session alone in October 1987, dropping another 12% the day after Black Monday as well. And make no mistake; there was very strong demand for gold last April. Just not in the form of financial securities or derivatives traded on Western exchanges.
Unique amongst major asset classes, physical gold enjoys a diverse set of buyers worldwide, with very different motives. Western savers want to spread their risk, owning a rare, tangible asset shows zero long-term correlation with economic growth. Industrial use accounts for another 15% of annual demand. India’s gold demand in 2013 hit record levels, leaping so fast on April’s crash that the government brought down the shutters, hiking import duty to 10% and imposing the “80/20 rule” which forces dealers to re-export 20% of any new shipment before taking delivery. Smugglers happily solved that riddle (India has no domestic mine output), taking the subcontinent’s full-year private demand to 975 tonnes at least on World Gold Council data, higher even than 2012.
China’s gold demand meantime rose faster still, finally overtaking the world No.1 and swallowing well over 1,160 tonnes of imports, even while topping the league table of gold mining nations with a further 440 tonnes. Together, this surging demand clearly put a floor under the gold price.
Bullion analysts don’t yet know how the world’s heaviest gold demand will react to a slump in household income or savings. But with China now deeply plumbed into the global economy, the tide of debt defaults now lapping at its $7.5 trillion shadow banking industry could hit capital markets worldwide. The West’s financial crisis proved that scared money buys gold. The metal’s huge outperformance across the last decade says the smart money buys gold in advance.