Gold dives amid weaker economic data
Panic gripped the gold market for a second day yesterday as investment funds continued to dump the precious metal even as weak economic data from around the world indicated the sell-off was already overdone.
"You cannot stand in front of a steam train," said Gerhard Max Schubert, the head of commodities wealth management at Emirates NBD. "When the price of gold is going down as low as $1,390 an ounce you are starting to hit the profitability of the gold miners, it is going far too low."
The price of gold first plunged into bear market territory on Friday with a 4.7 per cent drop as more than 400 tonnes of the yellow metal was sold. A single 125 tonne trade on America's Comex started a sell-off that morning, which has gathered pace ever since.
Gold futures for June delivery slid 6.3 per cent to $1,406.80 an ounce in early trading in New York yesterday, reaching as low as $1,385 as prices fell more than $116.
Gold for immediate delivery was down 5 per cent at $1,408.29 in midday London trading. There was also a broad sell-off of Asian shares yesterday after China posted lower than expected growth for the first three months of the year.
Traders said that gold exchange traded funds (ETFs) were leading the sell-off as they had already liquidated large parts of their portfolios. Gold ETFs have sold about 300 tonnes of the precious metal so far this year, compared to an acquisition of just 200 tonnes in the whole of 2012, according to Emirates NBD data.
"ETFs are fed up holding gold," said Tarek El Mdaka, the managing director of Kaloti Jewellery Group in Dubai. "People have been stubborn holding on to gold for years. They kept saying it will go up, it will go up. Now it is going down, so it is a panic for them."
The gold sell-off during the past two trading sessions has been so severe that what had become a common view that the gold price would reach $1,700 to $2,000 by the end of the year, now looks very difficult.
"I think $2,000 is out of the question now," Mr El Mdaka said. "Even $1,700 will be tough. I would say maybe $1,500 is more realistic but even then, will be hard. The market doesn't look very good for gold."
Mr Schubert, who was more optimistic about the long-term prospects for gold, believes that it might be difficult for the precious metal to get above $1,525 an ounce in the short term.
"I think $1,525 will be a psychological barrier that will be hard to breach," he said.
Some traders indicated that gold fell on speculation that the United States might stop printing money to help its economic recovery before the end of the year. Gold is considered a safe haven investment during tough times and an end to so-called quantitative easing in the US would signal an end to tough times.
Printing $85 billion (Dh312.18bn) of the US currency a month has kept the gold price artificially high since the economic crisis began in 2008, when the price of gold was just $890.
"I would personally be careful with the American growth story," Mr Schubert said, however. "As far as the real economic indicators are concerned gold should be stable at around $1,550 to $1,600. This is panic selling."
Others pointed to a plan by Cyprus to sell all of its gold holdings in an effort to meet strict European Union bailout criteria. But Cyprus only holds about 10 tonnes of gold - an insignificant quantity in terms of the global market.
"It is more a concern that Cyprus could become a blueprint for EU bailouts," Mr Schubert added. "You have Italy holding about 2,100 tonnes of gold, the fourth-largest holding in the world. If this was liquidated that would be a concern, but there is no indication that this will happen."
Mr El Mdaka said that the cost of holding gold is very high, so when the price begins to slip many investors are forced to sell. "The cost of carry is one important factor. Also many investors have moved away from gold towards riskier investments such as equities and real estate as they are convinced the economy is recovering, these things have combined to push the price down."
Stocks in Asia were also hit by a sell-off yesterday. The Shanghai Stock Exchange Composite Index dipped 1.12 per cent to 2,181.94 points, while the Nikkei 225 in Japan closed 1.55 per cent lower to 13,275.66.
The declines followed the release of data showing a slowdown in China, the world's second-biggest economy. Growth reached 7.7 per cent in the first quarter of the year, down from 7.9 per cent in the fourth quarter of last year. The figure was weaker than expected by many analysts.
Both of these factors would ordinarily be seen by the market as a bolster to the gold price, but not yesterday.
Julien Marcilly, the head of country risk at Coface, the global credit insurer, said he still expected growth to pick up to 8.5 per cent this year from 7.8 per cent last year.
"We are still positive in the short term on China," said Mr Marcilly. "The main reason behind the rebound is positive monetary policy, which will help banks lend more to households."
Other commodities also weakened as a result of the Chinese data.
Prices of Brent crude dropped 2.5 per cent to $100.55 per barrel in early trading in London yesterday, its lowest level in nine months. West Texas Intermediate fell 3.6 per cent to $88.05 per barrel in New York.