Gold’s Allure Up as Prices Sink, Buy a Wedding Ring at Least

Coordinated trading by algo traders at the Shanghai and New York stock exchanges led to fall in gold prices.

5 min read
As gold hits a five-year low, will Indians  rush to buy their favourite and most trusted precious metal? (Photo: Reuters)
Gold’s Allure Up as Prices Sink, Buy a Wedding Ring at Least

The Sudden Plunge

  • Gold prices hitting a five-year low is good news for Indians who believe in traditional method of hauling up jewellery for future
  • The plunge in gold prices suspected to be manipulated
  • Reports suggest the role of algo traders (those who alter algorithms) in the fall of gold prices
  • Fingers being pointed at China which has just declared its gold reserves, last time being in 2009

Gold prices at a five-year low probably brings more smiles on Indian faces than share markets touching a new high. Let’s admit it – Indians are gold bugs. We have always trusted gold more than any other financial asset as a store of value. This loyalty has been intact for generations and across the wealth spectrum.

But every time the precious metal touches a new high or a low, investors come up with the same questions: will prices go up from here or will it fall further? Should I buy now or should I wait some more?

So is gold a good buy at these levels or should one wait to buy? To answer the question let’s look at where has gold travelled from and why.


The Recent Fall and Conspiracy Theory

Gold prices have been on a slow slide since last week with few people noticing the fall, but on July 20 gold prices fell the most in a day since September 2013. The fall brought the price to its lowest in five years.

Reports say that the fall was a ‘bear attack’ by algo traders (traders using computer-based programmes to trade). It all happened in less than a minute with coordinated trades taking place at the Shanghai and New York exchanges during a period when volume is generally low and the impact of even a small quantity can result in a big movement in price. Futures contracts equivalent to 24 tonnes of gold were sold in the New York exchange and at exactly the same time 33 tonnes were sold in Shanghai. This resulted in gold falling by 4% across global markets.

Gold prices have wiped out nearly half the gains from last decade’s historic bull run. Prices peaked in August 2011 at $1,800 an ounce and presently are threatening to breach the psychological $1,000 per ounce mark.

 (Photo: iStockphotos)
(Photo: iStockphotos)

Why Is Price Falling?

Like most Indians there are many in the world who feel gold is a great store for value. Money chases gold in anticipation of bad times and leaves it when global economies are expected to do well. The present gold cycle demonstrates this.

Gold prices bottomed and started moving higher at the turn of the century. The move coincided with bursting of the dotcom bubble. After a historic run when gold prices moved from around $250 per ounce at the turn of the century to $1,800 per ounce in a span of just over a decade, prices started to slip again. The peak of gold prices coincided with most of the bigger issues of Lehman and Euro crisis being addressed. Though global economies have not grown, they have at least stopped shrinking.

Financial markets are now looking at a possibility of an interest rate hike by the US Federal Reserve. This move will signal that at least the US economy is on a strong footing, which indicates better opportunities.

The history of gold price movement shows a strong relationship with economic difficulties. During hardships gold prices are higher and when economy is looking good gold prices are subdued.

 (Photo: Reuters)
(Photo: Reuters)

Blame it on China

These days China is cited as a reason for all global problems. It’s no different in the case of gold. China was planning to diversify its holding for foreign exchange reserves which is presently worth $4 trillion. The country’s investments are largely in dollars and the country needed to diversify into other financial assets including gold. Investors were expecting that China will be sweeping away the gold market given its reserve position, but that did not happen.

Unlike other countries who are transparent in disclosing their gold reserves, China is not. The last time China declared its gold reserve was in 2009 when it said its holding was 1,054 tonnes which is a very small fraction of its foreign exchange reserve of $3.7 trillion then. But numbers released recently – a day before the sharp fall in gold price -- suggest it was only 1,658 tonnes. The country added only 600 tonnes in the last six year at a rate of 100 tonnes a year.

Few in the market believe this number. Market expectations ranged around 2,500 to 3,000 tonnes. That cash-rich China in fact bought lesser gold than cash-strapped Russia was hard to believe for the market. Lower than expected reserves data meant that China was in no hurry to diversify its foreign exchange reserve and might take a long time to do so going forward. The release of this data was the proverbial last nail in the coffin for the most optimist of gold investor.

Supply and Demand

In order to guess the price movement of a freely marketable product it is better to understand its demand-supply dynamics. A Thomson Reuters GFMS study, one of the most authentic on the gold market, shows that the gold price peak matched with a fall in demand-supply deficit.

The situation turned to a surplus or higher supply than demand since 2013. The situation is expected to turn from 2016 when supplies are expected to fall as smaller mines start closing on account of falling gold prices.

 (Photo: Reuters)
(Photo: Reuters)

Where are Prices Headed?

A strong US economy means a stronger dollar. A strong dollar has historically meant weak gold prices. Other parameters too, like subdued buying by China, low fund interests, a mismatch in supply-demand all suggest a weakening in gold prices.

Among Indians, however, some buyers have begun making a beeline for stores, if recent reports are to be believed. If you are planning to buy gold it would be a good idea to stagger it and not jump at once. There is still some room for gold to fall.

If you are getting married this year end, start by buying your wedding ring at least.

(The writer is Mumbai-based market analyst)

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