Gold unlikely to regain its shine any time soon
With the end of the metal's bullish momentum trade, hopes low prices will be too tempting for Chinese and Indian buyers look misplaced
It's been a tough couple of years for gold bugs.
Back in the summer of 2011, they were cock-a-hoop. With Europe in crisis and the media full of warnings that central bank money-printing would debase paper currencies and ignite inflation, gold was widely touted as the only reliable safe haven in a monetary system heading for meltdown.
With bullish analysts forecasting the metal's price would soar to US$3,000 an ounce or higher in the near term, investors duly rushed to buy.
For the next 12 months most enthusiasts kept the faith as the market struggled to go sideways. Then in October last year, the bulls began to surrender.
As the first chart shows, in the nine months since, the price of gold has collapsed by a third, falling to a near three-year low below the US$1,200 an ounce mark during intraday trading on Friday.
There was a clutch of reasons behind the gold bulls' capitulation. For one thing, after the European Central Bank made it clear it would do whatever was necessary to save the euro, gold lost much of its attractiveness as a defence against the collapse of the single currency.
Then, as it became apparent that despite all the warnings, quantitative easing by the world's major central banks was not fuelling runaway price rises, gold also lost its lustre as a hedge against future hyper-inflation.
Next, as the United States economy began to pick up steam, the US currency started to strengthen, weakening the US dollar price of gold. And as financial markets began to anticipate the eventual end of the US Federal Reserve's programme of quantitative easing, yields on US Treasury bonds rose, increasing the opportunity cost of owning zero-yielding gold.
But probably the biggest single factor behind gold's fall was the disappearance of the metal's bullish momentum trade, and the emergence instead of powerful fund flows out of the bullion market.
Among the most important forces behind gold's long rally had been the flow of investors' cash into specialist exchange-traded funds, or ETFs, whose holdings of gold peaked at almost 85 million ounces in December last year.
At that point, however, a few big sales by prominent investors, including hedge fund manager George Soros, badly dented sentiment, and other investors began to cash in their ETF holdings, too.
That prompted the ETFs to sell gold, putting downward pressure on the price, which triggered yet more liquidations. As the second chart shows, the trickle rapidly became a flood, with total ETF holdings of gold plunging to less than 66 million ounces by late last week, hammering the metal's market price.
To be fair, not everyone is discouraged. Last week a handful of die-hard bulls were still arguing that buyers in China and India were preparing to re-enter the market to take advantage of the new, lower prices.
But Chinese buyers are largely financial investors, who tend to buy gold when the price is rising, not when it is falling.
And while it is true that Indian jewellery buyers purchase more gold when the price falls, the Indian government is increasingly anxious to curb their demand.
With gold imports accounting for between a quarter and a third of the country's swelling trade deficit, in recent weeks the Reserve Bank of India jacked up import duties and banned loans to finance gold imports for domestic consumption.
As a result, emerging demand from Asian consumers is unlikely to be strong enough over the coming months to convincingly reverse gold's downward trend.
For now at least, the yellow metal has definitely lost its shine.