While it recovered some of its losses, the price is still trading around five-year lows and looks to be headed for a sixth consecutive session of losses.
For investors the question is, have prices dropped too far, or is there further room to fall? And, perhaps more importantly, given gold’s historic role as a safe haven, is now a good time to invest in the metal.
On the first point, according to ANZ Research, the price action on Monday was not driven by fundamentals. Rather, it said: “The nature, size and timing of the heavy selling suggests a market participant was taking advantage of low liquidity or some sort of forced selling had taken place (Japan is on holiday today).”
UBS too said much of the move was likely due to a combination of momentum and technical selling. But it added, while it was unclear what exactly triggered the move, one possible candidate could have been Friday’s announcement by the People’s Bank of China, that its gold reserves now sit at 1,658 metric tons, up from 1,054 tons.
Later newswire reports suggest that a single sell order for five tons of gold on the Shanghai exchange overnight was the intial catalyst for the rout on Monday, but the point still stands – investor confidence had already been dented by the news of China’s reserves.
This is the first update since 2009 and was much lower than many gold bulls expected it to be, but the market remains divided on exactly what the announcement will mean going forward.
One view is that, given its size and, thus, its ability to move prices with its announcements as well as its continued explicit encouragement to its citizens to buy gold, China is unlikely to have announced an increase in its reserves until it was finished accumulating its position.
This view is also supported by the fact that China admitted that given the size of its exchange reserves, the capacity of the gold market is small in relative terms
The counter argument to that is that, as a percentage of its total reserves, gold still only accounts for around 1.6% and from a diversification point of view, it is likely that the country will continue to buy.
In its latest global precious metals comment, UBS said: “The fact that prices are at multi-year lows understandably make investors nervous. On the one hand, the move lower has already been quite substantial.
“Given the extent of the decline and the current size of short positioning across precious metals, the propensity to add to shorts further at these levels becomes more laboured… But on the other hand, the threat of an even deeper correction cannot be shaken off, especially as prices sit precariously at these lows with seemingly little energy for a convincing rebound for now.”
The bank added that while there hasn’t been much interest in the precious metals space this year as there has in the past, there is a risk that the recent price action will attract investors and encourage additional shorts.
The big challenge going forward, it says, is that a considerable level of conviction will be needed for investors to make any meaningful positions and conviction has been lacking for some time now.
“We don’t think gold deserves to trade close to or below $1100 for a prolonged period, albeit any recovery from here is likely to be capped – price action is likely to stay choppy, with weakness resuming heading into the September FOMC meeting,” it added.
