Gold is sliding, but how far can it fall?
LONDON -- With gold tumbling almost 30 percent in 2013, analysts on London trading floors and managers running mines in Johannesburg, are asking, “How low can it go?”
Since the start of the year the precious metal has fallen 29.5 percent and the FTSE Gold Mines index of gold equities has fallen by 52 percent. And the slide continues, with fresh, three-year lows being seen last week.
“At the moment gold shares are not far off pricing in the end of the world,” says Evy Hambro, who as head of BlackRock’s gold and mining funds is among the world’s largest gold investors. Hedge fund managers have encouraged investers to doubt the wisdom of storing wealth in the metal, as they began betting against gold when the US dollar strengthened and inflation declined.
US Federal Reserve Chairman Ben Bernanke’s remarks about his intention to slow-down ‘money printing’ has put even more pressure on gold, which had started sliding with momentum in April. Some commentators have remarked that the investor move away from gold has been so dramatic, that its price is unlikely to fall much further in the short term, even saying that a rally is likely now that the price has fallen towards $1,200 an ounce.
But gold has a habit of surprising analysts and traders, and few are willing to state with any confidence where the bottom of the slide will be found. “The key question is how low do we go? For the gold market it is typically to the next round number, but we have moved so quickly that now people are forced to catch up,” says Kamal Naqvi, head of commodity investor sales at Credit Suisse.
“It is currently a race to be the most bearish among the analysts.” Gold bulls have been able to rely on Asian buyers during previous price declines, but Indians have been restricted by government rules on gold imports, and Chinese buyers don’t seem to think that prices have reached the bottom.
“Asian appetite simply isn’t there,” says Philip Klapwijk, managing director of Precious Metals Insights, a Hong Kong-based consultancy. It is extremely unlikely that the Fed Chairman will reverse his money-printing policy, so it is difficult to predict just what it is that will halt the sudden decline in prices. Some have suggested that the fall in gold prices is likely to stimulate a recovery in jewellery demand, which has fallen 30 percent since 2005 due to the steeply escalating prices.
Others have said that the lower prices will halt the sale of ‘gold for cash’, which last year made up 36 percent of the world’s supply. How much will prices need to fall for these old-fashioned fundamentals of the gold market to counterbalance investor selling?
“You’ve got to see scrap absolutely crushed down,” argues Mr Klapwijk. “That talks to me of a dlrs 1,000 price.”
Beware of holding cash in banks
European Union finance ministers have agreed a deal on new rules that will force investors and wealthy savers to share the costs of future bank failures.
The agreement was reached following a seven-hour meeting chaired by Minister for Finance Michael Noonan. The plan stipulates that shareholders, bondholders and depositors with more than 100,000 euros should share the burden of saving a bank, with a taxpayer-funded bailout now being a limited last resort possibility.
Mr Noonan said the agreement "marks a revolutionary change in the way banks are treated". The minister said it is "a major milestone in our effort to break the vicious link between the banks and the sovereigns".
He added that governments will no longer have to save banks that were too big to fail and that "bail-in is now the rule", putting an end to moral hazard by making it clear that banks will suffer before the government steps in to help, if it does at all. EU governments will now start negotiating the legislation with the European Parliament.
Dutch Finance Minister Jeroen Dijsselbloem said: "If a bank gets in trouble we will now throughout Europe have one set of rules on who pays the bill. "The financial sector itself will now to a very, very large extent become responsible for dealing with its own problems."
German Finance Minister Wolfgang Schaeuble said the agreement "is an important step" toward completing a banking union.