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Why the gold price is tumbling

Alan Kohler

Business Editor at Large
The bear market in gold took a rather dramatic turn for the worse yesterday when the price gapped down to its lowest level in five years due a big sell order in Shanghai.

Since peaking at above $US1800 an ounce in September 2011 it has been downhill all the way; the strategy of hedging exposure to fiat currencies and financial assets by buying gold bullion in one form or another after the financial crisis has turned out to be a very bad idea.

The non-appearance of inflation and the non-collapse of the US dollar have produced a bear market in all commodities, with the Bloomberg Commodity Index yesterday touching its lowest level since 2002. But gold, as always, has been a special case.

Last year some pundits were predicting $US5000 an ounce, now there are predictions of sub-$US1000.

It was a commonly held view that the gold price would inevitably rise as the world’s central banks printed money, apparently without limit.

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MOREMiners hit by gold price plunge
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Surely, went the almost conventional wisdom, as the supply of paper money massively increases, and it becomes increasingly distrusted, the world will return to trusting the only true store of wealth — gold.

In fact all those who allocated some of their money to gold bullion, gold ETFs or gold miners have lost money and the gold mining companies that were increasing production and mapping new seams just four years ago are now facing closure.

The fact that all commodity prices have fallen a lot — gold, oil, iron ore, base metals — is obviously terrible news for a commodity exporter like Australia.

The economy has slowed, wages are stagnant and governments are being forced to raise consumption taxes; the only good news about lower commodity prices for Australia is that the currency has fallen as well, providing a cure for the Dutch disease that saw the closure of the car industry.

But at a global level the falling gold price is not such bad news.

It’s happening because the US economic recovery is no longer in doubt, as a result of which the Federal Reserve is virtually locked into a first interest rate increase this year. Financial assets and the US dollar are no longer at risk.

And global inflation did not appear as expected, let alone hyperinflation: global inflation peaked at 4 per cent and many central banks are now trying to get it back UP to 2 per cent.

A chart of the nominal and inflation-adjusted gold price over the past 100 years suggests that the gold price might have a lot further to fall.

It tells you the “normal” price is about $US500 and there have been just two spikes to around $US2000 an ounce — in 1980 because of the actual runaway inflation of the 1970s, which was quickly corrected, and in 2011 because of an expectation of runaway inflation that turned out to be wrong.

After the inflation spike of 1980, the gold price returned to $US500. Will it do that again? That’s impossible to say of course, but it’s worth observing that high gold prices are usually associated with economic difficulties and low prices with calm and prosperity, so maybe that wouldn’t be so bad, if it happened.

Except that it would imply much lower commodity prices generally, a sub-US50c Australian dollar and some difficult, but not impossible, adjustments for the Australian economy.

The good news is that these are long cycles, so it could take 10 years for gold, and commodities, to reach bottom, so plenty of time to adjust.

But as we saw yesterday, there can be jagged edges along the way.
Go down more more

SPDR Gold Shares (GLD) -NYSEArca
105.70 Down 2.95(2.72%) 04:00 SGT|After Hours : 105.20 Down 0.50 (0.47%) 07:59 SGT

iShares Silver Trust (SLV) -NYSEArca
14.05 Down 0.18(1.26%) 04:00 SGT|After Hours : 14.05 0.00 (0.00%) 07:54 SGT
Gold's meltdown costs Russia, China $7.4b
August 7, 2015 - 7:56AM

Debarati Roy and Eddie Van Der Walt

The precious metal's 60-day historical volatility was near 11.8 on Thursday in New York, the lowest since late October. Photo: Reuters
Gold's meltdown has cost Russia and China about $US5.4 billion ($7.4 billion).

That's the value of the two countries' gold reserves that has been wiped out in less than three weeks as prices slump to five-year lows, dragged down by expectations for higher US interest rates and a stronger dollar.

Bullion's tumble is especially painful for Russia and China, the biggest buyers of gold over the past six years. China has expanded its holdings by almost 60 per cent since 2009, while Russia more than doubled its assets and added reserves last month as prices fell another 6.5 per cent.

Neither the Greek debt crisis nor China's stock-market rout has been enough to boost gold's appeal as a haven. Higher rates curb bullion's allure because it doesn't pay interest, unlike competing assets such as bonds.

"Holders of gold should be very concerned about the dislocation of gold's status as a safe-haven investment," Edward Dempsey, the chief investment officer at Pension Partners in New York, said in a telephone interview. "The strength in the dollar continues to weigh on gold."

Nations have expanded bullion holdings in the past few years, a reversal from two decades of selling since the late 1980s.

China on July 17 announced that it had boosted holdings to 1658 metric tons, the first update on its hoard since 2009. Russia bought more gold in July and now holds about 1275 tons, according to data from the International Monetary Fund. While they've been accumulating to diversify foreign-exchange reserves, investors have been selling.

In New York on Thursday, spot gold was up 0.5 per cent at $US1090.11 an ounce by about 2pm. The metal breached important technical support at $US1100 after selling in late July pushed it as low as $US1077, its weakest since February 2010. US gold for December delivery rose 0.4 per cent to settle at $US1090.10 an ounce.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell to 21.47 million ounces on Wednesday, the lowest since September 2008.

"In the medium term, with rising bond yields, EM (emerging markets) currencies collapsing, no safe haven demand and with the dollar potentially going higher on US rate expectations, there is no gold-friendly news out there," Saxo Bank senior manager Ole Hansen said.

Volume so far in August, already a slow time of year, has dropped about 8 per cent from 2014. On Thursday, trading was about 40 per cent below the 100-day average. With fewer participants, the metal's volatility has tumbled to the lowest in nine months.

The metal's 60-day historical volatility was near 11.8 on Thursday, the lowest since late October. Money managers have stayed net-short on the metal for two straight weeks, and banks including Goldman Sachs Group predict more declines for prices.

with Reuters
Other UOB, now BOC also offer gold savings account which is a convenient way to invest in gold
You can consider this from Bullionstar. In this program, you can buy and sell. Or if you wish so, convert your holdings into actual gold. Disclaimer: I am not using them.
There's all kinds of gold investment out in the market today just be aware about gold savings is this what you really intended and want.

That's not even real gold that you thought you owned, that's just a piece of paper priced in dollars of the commodity it could be some kind of gold futures or derivative that you and the bank are playing with each other.

I used to have gold savings many year ago, I remember the first time immediately after I opened an account right in front of me the bank manager picked up the phone and opened a "put" position against the amount that I just open for and I wondered about that for a long time.

Actually other than having a few pieces of gold for retail sale to cater to the odd walk in customer. It's not possible for any bank to have any meaningful quantities of physical bullion kept on site at their premises for any investment purposes like customers who want real "gold savings"

That's because all bullion for any trading need to be certified as good delivery and that's usually kept in designated exchange warehouses, once the metal leaves the warehouse it will lose that credential and cannot be traded until it is re-assayed and re-certified again.

So all the gold trading usually takes place on the "books" at the exchanges without the metal ever leaving the exchange warehouses.
An old article on gold

The Hows and Whys of Gold Price Manipulation
I see gold as an insurance.
gold does not earn returns. it just sits there as a security. a very shiny fixed deposit.

While the discussion was private and off-the-record, Joshua Rotbart, CEO of J. Rotbart & Co, was in attendance to highlight to the guests some of the key appeals of gold for their HNWI (High Net Wealth Individuals) client portfolio.
“We have one very wealthy Asian client, for example, with around USD40 million stored in gold. He says he is immune to all the political, financial and geopolitical vagaries of the world. Honestly, what other assets could he buy that would give him this real sense of security?”

Rotbart referred back to the global financial crisis that began in 2008, after which numerous people around the world lost faith in the established global financial system. “People also lost confidence in the governments that are supposed to protect them against malfunctions in the financial markets,” he reported, “with many suddenly realising that a financial investment that is a promise on paper is not always good enough in times of crisis.
Remember also Cyprus in 2013 when the government there took over cash deposits, which added to the general concerns about how to protect wealth.”

Rotbart highlighted the lack of counterparty risk. “Look back to 2008 when the governments began to print money en masse with the onset of QE,” he recalled. “Gold is outside the global financial system, it is physical, you can take it home, it is also private and confidential.”

Rotbart clarified that his company is headquartered in Hong Kong and also operates a Singapore office. He explained that for the last eight years he has been helping Asia’s HNWIs to buy, store, transport and sell physical precious metals, especially physical gold.

“We emphasise gold’s intrinsic value,” he explained, “and that it is ideal in times of uncertainty because it is accepted everywhere.
We explain that we look at gold not only as a commodity but also as a de facto global currency.
(03-11-2018, 07:14 PM)Luke Wrote: [ -> ]“We emphasise gold’s intrinsic value,” he explained, “and that it is ideal in times of uncertainty because it is accepted everywhere.
We explain that we look at gold not only as a commodity but also as a de facto global currency.

This is what I call marketing talk: using absolutes to catch headlines

If you bring USD into a department store or even shops, they can check it with machines or under the light. Try doing that with gold nuggets. The expertise of verifying gold I think has been long lost in common folks.

In modern times gold is useful only in extreme dire straits or circumstances like war but the huge bid/ask spread is still there. Last I heard of people using gold as a currency is Vietnam war. Not even Iraq or Afghan war do I hear gold widely used as a currency but more as a "perceived" store of value.
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