April was
the month when gold prices drop to two-year lows in a pullback that raised
questions over the metal's safe-haven status but also offered an opportunity to
buy into the market at lower levels. As a justification of the latter, Russia,
Kazakhstan and Azerbaijan increased their gold holdings last month by a
cumulative 75% more than they did in March, according to the monthly gold
buying report of the International Monetary Fund. The report represents the
activities of most central banks and it is a good reference point to gold
investors.
Official
purchasing has always provided important support for gold prices. According to
the World Gold Council, central bank buying represented 11.3% of all gold
demand in the first quarter of this year. However, central bank activity did
not only do good for prices, it was also an important factor in gold's plunge:
the news that Cyprus was considering selling 10 tons of gold from its central
bank reserves to raise cash strengthened fears that other indebted European
nations, including Italy, which has the world's fourth-largest gold reserves, could
follow suit. Investors have been eagerly waiting for the latest IMF report, as they
wanted to see whether central banks would have ignored gold as prices fell, or
if they would come into the market to buy. Altogether, the IMF data shows
central bank holdings rose 972,000 ounces last month and this buying activity
signals expectation that gold can hold its value over the long term. Central
banks tend to buy slowly and hold gold over long periods rather than moving in
and out of the market on a day-to-day basis, which helps buffer spot prices
from their activity.
Gold prices
shed as much as 17% in April and ended the month 7.5% lower. It is currently trading
around $1,390 an ounce, down almost 12% since the start of the year. Could
central bank buying help to recover faith in gold? The Wall Street Journal’s
Money Beat blog enlists 5 reasons why gold may fall further:
1. The U.S. Federal Reserve could cut stimulus sooner rather than
later. Money printing by the Fed has been a major support to gold
prices in recent years, reflecting the metal’s traditional appeal as a hedge
against currency weakness and inflation at times of heightened liquidity.
However, the Fed is now looking at dialing that program back.
“The ever louder discussion at the Fed of tapering back or even ending
quantitative easing has undermined gold’s appeal as protection against high
inflation,” said Macquarie precious metals analyst Matthew Turner.
2. Investor sentiment is poor. A survey by Credit Suisse
based on responses from a poll of around 185 Credit Suisse clients, showed that
60% of investors named gold as the commodity with the worst forecast when
compared with copper, crude oil and corn. More than half of respondents expect
gold to trade below $1,400 per ounce in a year’s time. Gold currently trades at
around $1,380/oz.
Credit Suisse analysts are even more bearish, with head of global
commodities research Ric Deverell predicting the price could even fall below
$1,000 within five years: “The next big level is going to be about $1,305 per
ounce. I expect that it will get to this point quite quickly, I wouldn’t be
surprised if this was in the next couple of weeks.”
3. The U.S. dollar is strong. The greenback has been on
the rampage in recent weeks, climbing against a batch of other currencies
amid signs that the U.S. economy is recovering and amid expectations that the
Fed’s QE may soon come to an end. Since gold is priced in dollars, a
strong greenback dampens its appeal to other currency-holders.
“The U.S. Dollar has really reigned supreme over the course of the past
week,” said independent markets commentator Dennis Gartman. “It shall continue
to do so as we move forward.”
4. Indian gold demand faces risks. India is traditionally
world’s biggest consumer of gold, accounting for over a third of global demand
last year. When gold prices slide, subsequent appetite for the metal by
price-sensitive Indian buyers often lends a measure of stability to prices, as
was the case after gold’s dramatic tumble last month to a more than two-year
low at $1,321.50 an ounce. This time around, Indian gold investors may not be
so willing to buy, however, said Georgette Boele, an analyst at ABN Amro.
Indian gold demand is seasonal, and the timing of last month’s price
drop—just weeks before the Akshaya Tritiya festival on May 13, which is
considered one of the most auspicious day to buy gold in the Hindu
calendar—boosted India’s demand for gold, noted Ms. Boele.
“As this day is now behind us, demand for gold for wedding ceremonies will
ease,” said Ms. Boele. “The next important auspicious days are Vijaya Dashami
on October 13, Diwali Night on November 2 of the five-day festival of light,
Diwali, and Gudi Pavda, or New Year’s day of the Hindu calendar, on March 31.”
That of course could be a case for the bulls come Fall.
5. Further ETF holdings could still be sold. A major
factor in gold’s recent price weakness has been the liquidation of gold-backed
exchange-traded funds. According to the World Gold Council, a trade group for
gold miners, investor demand for gold fell by 49% year-on-year in the
first quarter, largely driven by 177-ton drop gold ETF holdings.
There still remains a large overhang of gold tied up in exchange-traded
funds, however, noted ABN Amro. According to the bank, more than 71 million
ounces are still held in gold ETF positions, meaning that further liquidation
could continue.
“The lower the gold price, the more nervous investors holding these
positions will become,” said ABN Amro analyst Georgette Boele.
