May 21, 2012 12:14 pm
Gold lull may just be a pause for bulls
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At gold dealerships such as Manfra, Tordella & Brookes in downtown Manhattan, the phones have been ringing off the hook for the past four years.
When Lehman Brothers declared bankruptcy in September 2008, investors rushed to buy gold. When the eurozone crisis erupted in 2010, they bought more. When the US lost its triple A debt rating last summer, they bought even more.
But this year, the buying has fizzled out. “There are days here where we wonder if the phones are working,” says Mike Kramer, president. He estimates that sales of gold and silver coins and small bars have fallen 50 per cent in the past couple of months.
He is not alone. Particularly in the US, but also in Europe and Asia, interest in gold and silver has waned.
The widespread apathy towards the precious metals has taken its toll on prices. Last week, gold slid to a four-month low of $1,527 a troy ounce, down 20.5 per cent from its record high of $1,920 last September.
The shift is most clearly seen at the level of coin demand – often seen as a leading indicator for sentiment.
Sales of gold American Eagles, the popular investment coin, are down 63 per cent year on year since February, according to the US Mint. Sales of Vienna Philharmonics, more popular in Europe, fell 19 per cent for gold and 31 per cent for silver in the first quarter, according to the Austrian Mint.
With even retail investors – as analysts call ordinary people – appearing to lose interest in gold, the overwhelmingly bullish consensus among traders is being questioned.
“Is gold losing its lustre as the currency of last resort?” asked Goldman Sachs in a recent report. HSBC, Barclays, UBS and Macquarie have all downgraded their forecasts.
Part of the reason for the fall in demand is the better economic data from the US that has dimmed hopes of further quantitative easing, or emergency Federal Reserve bond-buying.
But investors have also been disappointed by gold’s performance. Not only has it fallen in price, but it has fallen most when fears about growth and the eurozone crisis have picked up, confusing investors who bought it as a haven from financial turmoil.
The traditional link between gold and inflation-adjusted interest rates – as interest rates fall, so does the opportunity cost of holding gold – has also broken down.
“I’m not hearing the intensity in people’s voices now in terms of being driven by fear to buy precious metals,” says Jonathan Potts, managing director at FideliTrade, a large US bullion dealership. The past two months, he says, have been quieter than any time since 2007.
Finally, the traditional prop of the Asian physical markets has been absent.
In previous sell-offs, Asian investors have willingly snapped up gold at lower prices. Not so this year. Dealers in Zaveri Bazaar, Mumbai’s largest gold market, tell similar tales of woe to their American counterparts.
“Giving gold as small gifts has totally stopped, and people now buy 25 to 30 per cent less weight than usual for weddings,” says Dilip Tulsiani, manager of one store. Indians have not lost interest in gold, but a collapse in the value of the rupee has kept prices high even as the dollar-denominated market was falling.
A push by the government to curb gold imports by introducing new taxes has further knocked demand. Indian gold demand was down 29 per cent in the first quarter compared with 2011, according to the World Gold Council and GFMS. Western importers say that sales in the past two months are down 50 per cent or more year on year.
The combination of weak demand in the west and Asia is making traders nervous. “I could see gold at $1,400,” says one senior banker. Some asset managers have also been selling a portion of their gold holdings, says Marcus Grubb, of the industry-backed World Gold Council. Investor positioning in gold futures and options is the least bullish since December 2008, according to Barclays Capital.
For all that, however, few are ready to conclude that the bull market is over. The possibility of a Greek exit from the eurozone, weakening economic data from the US and the political uncertainty of the US election could all reawaken interest in gold. Central banks have remained steady buyers throughout the fall in prices.
“We believe that the case for higher gold prices remains in place,” says Jeffrey Currie, head of commodities research at Goldman Sachs.
Indeed, from its low last Wednesday, gold has rebounded nearly 5 per cent and on Monday was once again flirting with $1,600.
“We’re starting to order more in the last two weeks,” says Terry Hanlon, president of metals at Dillon Gage, a dealer and refiner. In Zaveri Bazaar, consumers are already relishing the drop in prices. “Gold was too expensive six months ago,” says Khushboo, a resident of Mumbai’s suburbs. “We’ve been waiting for prices to come down, which is starting to happen now.”
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Copyright The Financial Times Limited 2012.
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