Gold's safe-haven status tarnished by speculators

Gold's safe-haven status tarnished by speculators

Its price has become more volatile as short-term investors and speculators dump the precious metal to raise cash

Mon, Mar 30, 2020

NEIL BEHRMANN


VOLATILITY has been so extensive amid the current global financial slump that analysts and investors are questioning claims that gold is a safe haven.

Even the World Gold Council (WGC), the research and marketing organisation of member mines, is concerned about the unpredictable price moves. ''Investors are still worried about the full impact of coronavirus on the global economy and gold has not been immune to this volatility,'' said Krishan Gopaul, an analyst of the council.

Gold has been recently trading within a range of US$1,450 to US$1,700 an ounce, and settled at US$1,620 last Friday. The price fell in tandem with the stock market when investors and speculators dumped the precious metal to raise cash.

It then rallied with equity markets when US, UK, French and other governments promised massive backing for businesses and workers. Negative interest rates and a flood of central banks' money also encouraged gold bulls.

Despite Middle Eastern turmoil, the coronavirus crisis and future inflation fears, gold has struggled to match the 2011 record price of US$1,917 an ounce. This compares with the all-time peaks of US equity markets prior to the crash.

Many professional and retail investors have persistently misread the gold market because it is multi faceted. First, gold is a monetary asset. Central banks hold 34,736 tonnes worth US$1.8 trillion at current prices. That gold is held and bought to back and bolster reserves.

In times of a nation's need, the bullion can be sold to repay debt and meet emergencies. For example, central bankers sold 4,426 tonnes of gold between 2000 and 2009, and in the past 10 years Russia, China, Turkey and others bought 5,019 tonnes.

Indeed, there was an unconfirmed rumour that Russia had sold bullion in recent weeks because the oil price slump damaged its finances.

Second, gold is also a commodity, which is used extensively in the jewellery industry and to a lesser extent in technology, dentistry and other industrial uses.

The WGC noted that high prices and weakening economies had already cut jewellery consumption in India, China and Europe in the second half of last year. Combined gold jewellery demand in India and China, which already fell by 8 per cent to 1,182 tonnes in 2019, is bound to slump in the first half of this year.

Anantha Padmanaban, chairman of the All India Gem and Jewellery Domestic Council, estimated that purchases would plummet by 30 per cent in 2020. Similarly, the lockdown in Italy will severely damage the nation's historic jewellery design and manufacturing industry.

To some extent, however, production shutdowns in three major Swiss precious metals refineries and in South African and other mines will partly counter the collapse in physical demand.

Since jewellery demand has slumped, the key to gold price prospects is the third facet of gold. This is investment and speculation.

The steady gold investor tends to place about 5 to 10 per cent of assets directly into gold bullion and bars for the long term. For them, gold is effectively a currency and a hedge against inflation, dollar depreciation and political and financial turmoil.

Some of these investors buy gold to evade tax and the law, but global banks are under increasing pressure to disclose any wrongdoing to relevant authorities.

The second type of investor and speculator includes hedge funds, commodity trading advisers and individuals. It is this group that is behind the price gyrations.

'Speculative demand for gold has made the gold price more volatile and gold is behaving less as a safe haven,'' contends Georgette Boele, senior foreign exchange and precious metals strategist at ABN Amro.

According to the Commodity Futures Trading Commission, net-long bullish large and small gold futures and options speculative positions were equivalent to 973 tonnes.

As at the end of February, investors and speculators also held 3,033 tonnes in Exchange Traded Funds. The combined total of 4,006 tonnes is almost double last year's total global jewellery demand of 2,107 tonnes.

In other words, the gold price appears to be dependent on the whims and fancies of these short-term investors and speculators. It's little surprise the price has tumbled when they nervously dumped gold to cover losses on equities and other assets.