Even gold bugs bug out at some point in a panicky market. In the face of an apparent global economic meltdown, the ubiquotous safe-haven play hasn’t been a safe haven for precious metals investors. Gold prices have slumped to a one-month low in the commodities market, dropping as low as $779 an ounce in Friday’s trading, down $120 an ounce in the span of a week. What gives? Shouldn’t the state of other markets - whether equities, credit or energy - be chasing everybody into gold? After all, a lot of cash has been raised during the redemption-fever of the last several trading sessions. It can’t all be going into a coffee can in the freezer. And the financial system remains in distress. When bank stocks in the U.S. fell to their rock-bottom valuations in mid-July, gold was changing hands at $986 an ounce. It got over $1000 shortly after Bear Stearns collapsed. How come it’s not responding this time?
In reality, the very conditions that should, under conventional wisdom, be chasing investors into the gold market are, in fact, working against gold’s appeal. For instance: economic conditions. What everybody has become afraid of is that the global economy has plunged into recession. Gold is traditionally used as a hedge against inflation. (Granted, this didn’t play out during the Great Depression, to which current economic conditions increasingly have become compared.) Despite expectations of further rate cuts, the constriction of the credit market and the sluggishness of the consumer, not to mention the continued deterioration in the housing market, have tempered any inflation fears recently. The ”panicky markets” rationale? If it’s true that investing is ruled by either fear or by greed, then we’re stuck with a market that’s decidedly in the thrall of the former. The absence of greed means investors aren’t chasing into gold. They’re too busy sitting in the corner of a dark room hoping all this stops soon.
Mostly, though, this is a market that’s been controlled by furious liquidation. And that liquidation hasn’t allowed the gold market to escape. Whether it’s a forced liquidation by hedge funds working to meet redemptions or margin calls, or retail investors liquidating their commodity ETFs after a long, painful decline, investors are in heavy liquidation mode. Most of the commodities products, especially ETFs and other basket strategies, contain some measure of precious metals exposure, even if they’re primarily basic materials plays. The indiscriminate selling is what has dragged prices down. There can be the occasional hiccup along the way, such as the one that took place Oct. 10, when gold jumped $67 an ounce one day. But keep in mind that crude reached its zenith in July at $147 a barrel when SemGroup, the Texas energy trading firm, got caught in a short squeeze shortly before going bankrupt. And look what’s happened to oil prices since.
There have been some popular conspiracy theories out there, including the one that FT’s Alphaville has been debunking Friday: that gold has fallen because central banks are selling or lending reserves to failing banks. The market, presumably, has been flooded with gold that banks are using as collateral in borrowing. (Forgetting, for the moment, that the commodities futures market is essentially a trading market, and has very little to do with the physical metal.)
Regardless of the rationale, the decline in the commodities market has wrought some havoc on stocks of gold producers, most of which are trading at lows for the year. Barrick Gold (ABX) lost another 3% Friday. Gold Fields (GFI) declined 3% as well. Newmont Mining (NEM) fell 4%. All in all, a rather unusual development, given the broader backdrop.
