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THE way it has been described by some analysts, gold was the subject of “a hit” last week in which the metal recorded its highest one-day decline in 30 years.
“If you look at the nature of the selling, it’s almost as if it was bombed,” said Chris Hart, senior economist for Investment Solutions.
“I’m not into conspiracy theories and the like, but you’d have to be naïve not to think the markets aren’t being manipulated,” he added.
The good news is that most analysts remain positive on gold.
“While the recent moves in the gold price are unsettling, we remain positive on the fundamentals for gold given that we do not believe that the world’s global economic problems have been solved,” said Investec Securities.
So what happened last week when the price of gold slipped by over $100 per ounce and headed towards $1 400/oz? And had this price, as some analysts believed, been factored into the price of gold shares for some three months previously?
On April 12, the gold futures market opened in New York to “a monumental” 3.4 million oz – about 100 tonnes – of gold selling. Immediately, technical selling was triggered; these are levels set by investors that when breached lead to mandatory selling.
According to Ross Norman of Sharps Pixley, a UK brokerage, a further 10 million oz blast of selling – about 300t – followed in just 30 minutes of trading.
“This was clearly not a case of disappointed longs leaving the market,” said Norman. “It had the hallmarks of a concerted ‘short sale’,” he added.
The aim of such a daring "short sale" was to prompt others to panic and therefore put bearish investment positions taken by the shorts “into the money”, as it is called.
To gain an understanding of the scale of the trade, the estimated 400t of gold futures selling that eventually took place was equal to 15% of annual gold mine production. In value, it was $20bn worth of trade. Staggering, really.
The impact on South African gold shares was pretty dramatic. At the time of writing, a steady rebound in the gold price was prompting some recovery.
Yet there’s no denying that local gold shares had been taking a pasting all year, partly owing to liquidations in gold-backed exchange-traded funds. The withdrawal of this money from the market had already hurt confidence in the gold price.
As an essentially monetary asset, gold’s success turns on providing an alternative to the dollar. The continued presence of quantitative easing, where money is pumped (or printed) into the US economy to stimulate confidence and liquidity, is the reason expectations for the gold price were relatively good.
The economic crisis in Cyprus was another, notwithstanding the possibility Cyprus could sell gold reserves to shore up the national balance sheet. That’s because gold is viewed as a traditional store of wealth, so conventional wisdom states.
If the gold price remains relatively low, however, there’s the question as to whether SA gold shares will have to apply new gold price assumptions into their economic models.
Issues which might require reconsideration include the level of mineable reserves and resources, which could affect future gold production.
“If portions of reserves are then rendered uneconomic, it could mean less capital expenditure in the future, but less production growth too,” said a UK gold analyst who asked to remain anonymous.
Said David Davis, an analyst for SBG Securities: “The dilemma is that if the gold price remains low and inflationary pressures remain, then the margin will close and that will certainly compound pressures on reserves.”
Davis has, for several months, been calling on SA gold companies to undertake sweeping restructuring anyway. Even at previously higher gold prices, he thinks inflation is changing the industry. So what now? All eyes on the gold market, is the answer.
According to Norman, there’s a standoff under way between the longs (those who think the price of gold will go up) and those who think it will go down (the shorts).
Both sides have big bets to protect, a polarisation in the market that Norman likens to a tug-of-war. “At the end of the day, it is a question of who has got the biggest guns – the shorts have made their play – let’s see if there is any response from the longs to defend their position.”
- Finweek
For more go to finweek.com, or follow Finweek on Twitter.
“If you look at the nature of the selling, it’s almost as if it was bombed,” said Chris Hart, senior economist for Investment Solutions.
“I’m not into conspiracy theories and the like, but you’d have to be naïve not to think the markets aren’t being manipulated,” he added.
The good news is that most analysts remain positive on gold.
“While the recent moves in the gold price are unsettling, we remain positive on the fundamentals for gold given that we do not believe that the world’s global economic problems have been solved,” said Investec Securities.
So what happened last week when the price of gold slipped by over $100 per ounce and headed towards $1 400/oz? And had this price, as some analysts believed, been factored into the price of gold shares for some three months previously?
On April 12, the gold futures market opened in New York to “a monumental” 3.4 million oz – about 100 tonnes – of gold selling. Immediately, technical selling was triggered; these are levels set by investors that when breached lead to mandatory selling.
According to Ross Norman of Sharps Pixley, a UK brokerage, a further 10 million oz blast of selling – about 300t – followed in just 30 minutes of trading.
“This was clearly not a case of disappointed longs leaving the market,” said Norman. “It had the hallmarks of a concerted ‘short sale’,” he added.
The aim of such a daring "short sale" was to prompt others to panic and therefore put bearish investment positions taken by the shorts “into the money”, as it is called.
To gain an understanding of the scale of the trade, the estimated 400t of gold futures selling that eventually took place was equal to 15% of annual gold mine production. In value, it was $20bn worth of trade. Staggering, really.
The impact on South African gold shares was pretty dramatic. At the time of writing, a steady rebound in the gold price was prompting some recovery.
Yet there’s no denying that local gold shares had been taking a pasting all year, partly owing to liquidations in gold-backed exchange-traded funds. The withdrawal of this money from the market had already hurt confidence in the gold price.
As an essentially monetary asset, gold’s success turns on providing an alternative to the dollar. The continued presence of quantitative easing, where money is pumped (or printed) into the US economy to stimulate confidence and liquidity, is the reason expectations for the gold price were relatively good.
The economic crisis in Cyprus was another, notwithstanding the possibility Cyprus could sell gold reserves to shore up the national balance sheet. That’s because gold is viewed as a traditional store of wealth, so conventional wisdom states.
If the gold price remains relatively low, however, there’s the question as to whether SA gold shares will have to apply new gold price assumptions into their economic models.
Issues which might require reconsideration include the level of mineable reserves and resources, which could affect future gold production.
“If portions of reserves are then rendered uneconomic, it could mean less capital expenditure in the future, but less production growth too,” said a UK gold analyst who asked to remain anonymous.
Said David Davis, an analyst for SBG Securities: “The dilemma is that if the gold price remains low and inflationary pressures remain, then the margin will close and that will certainly compound pressures on reserves.”
Davis has, for several months, been calling on SA gold companies to undertake sweeping restructuring anyway. Even at previously higher gold prices, he thinks inflation is changing the industry. So what now? All eyes on the gold market, is the answer.
According to Norman, there’s a standoff under way between the longs (those who think the price of gold will go up) and those who think it will go down (the shorts).
Both sides have big bets to protect, a polarisation in the market that Norman likens to a tug-of-war. “At the end of the day, it is a question of who has got the biggest guns – the shorts have made their play – let’s see if there is any response from the longs to defend their position.”
- Finweek
For more go to finweek.com, or follow Finweek on Twitter.
