Biggest gold sell-off in 30 years

China , Commodities , Gold , Metals , Precious metals Apr 16, 2013 No Comments

GoldLast friday, commodities tumbled on US retail sales news, led by metals and precious metals. But yesterday, gold plunged to $1,357 after disappointing news on China first quarter growth over the week-end.

The 7.7 percent increase in first-quarter Chinese gross domestic product from a year earlier marked the first time in data going back two decades that four periods in a row have seen growth of less than 8 percent. The figure released by the National Bureau of Statistics of China was also the worst miss of analyst estimates since the third quarter of 2008. Consequently, gold dropped below the threshold of $1,400 an ounce, after falling under $1,500 last week, its lowest level in two years.

Commenting on the gold price “collapse,” Scotiabank chief foreign currency strategist Camilla Sutton said there are worries of forced liquidations of gold inventories. “Potential European Central Bank selling combined with two major banks issuing sell recommendations last week seem to have sparked the sell-off,” Sutton noted. There has been speculation Cyprus may sell gold reserves to finance its financial rescue. That may not happen, but it was enough to prompt some investors to think that a gold-selling strategy may be used elsewhere in the troubled eurozone.

Historically, many investors think of gold as an alternative investment when economic times get tough. The precious metal soared in the years following the financial crisis and continued rising as Europe dealt with its monstrous debt problems.

Last week, gold started to fall on worries that debt-troubled Cyprus would sell a big chunk of its reserves to foot the bill for portions of a bailout. This has spurred fears that other European countries struggling with high debts, particularly Italy, Spain and Portugal, might also sell some gold reserves. On Monday, the sell-off continued after China, the world’s biggest buyer of gold besides India, reported slower-than-expected growth. Investors worried that Chinese consumers, faced with less cash, may buy less gold. What’s more, if China‘s economy continues to significantly slow, it will affect economies across the world and hurt exporters of raw materials that have come to demand on surging Chinese demand over the past decade.

Also, there are views that Japan with all their printing off of money is undermining its own currency and has changed the risk assessment around the world, so investors are now unsure if gold is actually as safe as before. Investors are also not sure about inflation and if it is going to be a big problem anymore. So that is another reason for the sell off.

After a decade of growth, which led gold from $300 to $1,900 per ounce in September 2011, the precious metal seems sucked this time in a downward spiral. It will probably be June or July and the early rituals gold purchases in India, the world’s largest consumer, before it becomes clear if a recovery is possible or not.

In the medium term, said Michael Widmer of Bank of America-Merrill Lynch, the demand for jewelry will prevent the gold price from falling below $1,200. Purchases increase when prices go under $1,500, says the analyst who dropped his $2,000 price target for 2014. Rising incomes of a large part of the developing countries population also support the demand for precious metals. At $1,250 dollars, the pressure will intensify on gold producers, who will have to reduce supply by closing less profitable mines. By 2016, the analyst expects the demand for jewelry will be able to keep the price above $1,500.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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