Gold enthusiasts have had a week to forget after the precious metal posted its largest ever daily decline, slumping 12 percent in two days of panic selling. Bullion’s dove to two-year lows and at US$1,400 an ounce the price well below its 2011 high of US$1,920, with 2012 forecasts of new highs above US$2,000 seemingly crushed.
Monday’s US$110 fall was its biggest drop since 1980, and the traditional “safe haven” asset could even hit a new low around US$1,245, according to some analysts.
Earlier, Goldman Sachs analysts downgraded gold to a “sell,” saying the price fall marked the “death bell” of the resource super-cycle, adding to the bearish commentary from rival brokers Citigroup and Societe Generale.
After 12 straight years of gains, is the bull market for gold over?
According to ETF Securities (Australia), the gold price has trended down since October 2012 due to increased investor appetite for “cyclical and risky assets” resulting from improved global growth expectations.
The strengthening of the U.S. dollar, aided by eurozone weakness and Japan’s aggressive monetary easing, has added further impetus to the gold price fall, ETF Securities Australia’s Danny Laidler said in a research note.
Gold’s sudden sell-off last Friday and Monday this week was blamed on “speculative investors” acting on a number of factors, including concern over an end to U.S. quantitative easing, reports of Cyprus and potentially other European nations shedding gold reserves, and hedge fund selling triggered by the breaching of “technical support levels”.
“The gold price will face headwinds as long as U.S. interest rate expectations continue to rise and the U.S. dollar continues to strengthen,” Laidler said.
The sell-off was felt from Toronto to Sydney as gold miners felt the fear of investors. The world’s two top gold miners by market value, Canada’s Goldcorp and Barrick Gold, both saw their shares slump, with gold miners listed on the London and Sydney bourses also dragged down.
Furthermore, after record mine production in 2012, the reduced prices have sparked concerns of companies shedding mines and jobs, given the industry’s estimated average “all-in” cash cost of US$1,200.
Despite last year’s rally, gold stocks have suffered from cost blow-outs, high operating expenses and weak profits. A lack of hedging may also impact on finances, with tight debt and equity markets hindering miners’ access to capital.
Previously active buyers, gold exchange-traded funds (ETFs) have suffered outflows of US$21 billion this year, according to RBS Morgans.
Yet reports of the industry’s demise may have been exaggerated, despite criticism from billionaire investors such as Warren Buffett and George Soros.
According to an annual survey by Thomson Reuters GFMS, gold will rebound to reach the mid-US$1,800 this year over lack of confidence in U.S. debt control.
“Gold is likely to remain very sensitive to U.S. monetary policy and even though we’ve had some hawkish noise from some within the Fed, it’s difficult to see a material unwinding of the [quantitative easing] program until well into 2014, and so that should continue to underpin the gold price in 2013,” GFMS forecaster Neil Meader said.
Central banks hold around 20 percent of all gold reserves and have been active buyers, with demand hitting a 48-year high in 2012 aided by emerging market buying from Brazil, Paraguay and Sri Lanka. China has also become the second-largest source of physical gold demand behind India.
Meanwhile, supply has been constrained with production growing by just over 9 percent over the past decade, while gold discoveries have nearly halved.
For producers, industry experts point to the option of changing cut-off grades and seeking operational efficiencies, rather than closing mines in response to lower prices.
“The longer term fundamentals for gold remain strong and ultimately should reassert themselves once cyclical and technical factors move again in gold's favor. The fragility of the U.S. recovery, ongoing eurozone weakness and continued high sovereign debt risks are likely to keep central banks firmly in aggressive stimulus mode,” ETF Securities’ Laidler said.
He added: “Until the countries backing the world's major reserve currencies put in place credible policies to control their growing debt burdens, the public will look to gold as one of the few hard currency hedges against the risk these countries continue to try to reduce their real debt burdens through the debasement of the purchasing power of their currencies.
“Gold will remain in a bull market until these debt issues are resolved or a credible and liquid alternative to the current fiat reserve currencies emerges.”