By the end of last week the price of gold had fallen 21% below its all-time high of $1896 reached in September 2011, signalling a technical bear market.
Cypriot rumours
Rumours that Cyprus was preparing to sell gold to meet some of its debt liabilities is said by some to have put downward pressure on the metal towards the end of the week.
Nitesh Shah, associate director of research at ETF Securities said: “Investors were concerned that other countries could follow Cyprus’ lead to reduce debt burdens.
“While downward momentum gathered pace as technical levels were breached, such a debt reduction approach seems unrealistic given the small value of sovereign gold holdings relative to debt, even for large holders like Italy.”
However, Gary Dugan, chief investment officer Asia and Middle East at Coutts, said that neither the crisis in Cyprus nor the most recent flare-up in North Korea prompted sustained buying of gold, despite its reputation as a safe asset in times of geo-political strife.
“Part of the reason for gold’s demise is the robust performance of the dollar. The suggestion the US Federal Reserve might pull back on its quantitative easing, the Bank of Japan’s commitment to pushing the yen lower and ongoing worries in the eurozone have all been supportive of the dollar and given less reason to hold gold.”
Investor confidence
Other commentators believe increased confidence in the market is prompting investors to sell off their ‘insurance policy” gold holdings and move into riskier assets. This may also lead to short-term investors getting caught up in a sell-off as speculators and hedge funds look to reposition their portfolios.
A counter argument, however, is that investor confidence remains low and the fall in the price of gold is merely a reflection of its unreliability as a safe haven asset.
David Hambridge, investment director at Premier Asset Management, said: “Lots of people own gold, and we accept their reasons for doing so, but the market has become so crowded it is no wonder people are exiting.
“It has been very volatile over the past year, and more equity-like than a so-called safe asset should be. It is just my opinion, but the falling price of gold is nothing to do with Cyprus, or investor confidence; people are simply looking to leave the party.”
Golden opportunities
While the price of gold is plummeting at the moment, some argue the current rounds of QE being implemented by governments across the globe could see the price going back up a few months down the line.
Adrian Lowcock of Hargreaves Lansdown, said: “Longer term the outlook for gold is more positive, particularly as it gets cheaper. Central banks continue to be buyers of gold and are expected to purchase 450 tonnes of gold in 2013. The loose monetary policy of Japan, UK and US and huge amounts of QE are storing up problems for the future and are likely to weaken currencies, potentially driving up inflation.
"Gold provides an insurance against this and investors should be wary of selling their insurance policy just because it appears they didn’t need it in the past.”
The news of declining gold values conflicts with predictions at the end of last year that gold prices would climb in 2013 and eclipse the previous high of September 2011.
