Gold is a “very seasonal animal”, as Hong Kong-based research house Gavekal says in its latest client note. Indeed, demand for gold jewellery is still low in India – the world’s largest consumer of bullion – ahead of an expected spike for the annual Diwali festival in mid-October.
But there seems to be more than just seasonality to recent moves in gold prices, which surged on Wednesday to a near three-month high as nervous investors turned to the precious metal after a decline in equity markets.
The rise pushed gold above some resistance levels on Wednesday afternoon, triggering a wave of technical buying, while spot bullion in London, the market’s benchmark, rose to an intraday high of $975.70 a troy ounce, up 2 per cent on the day, and the highest since early June.
A perennial excuse for buying gold is to hedge against the inevitable downfall of the dollar, when the surplus nations start dumping US currency assets en masse. But that makes little sense, argues Gavekal, as “neither China nor any of the other surplus countries would want to destabilise the world’s largest and most influential economy by dumping… Treasuries on the market”.
Gavekal’s theory – you’ve heard it before, but interestingly, it has acquired a new lease on life this week – focuses on growing fears of further financial turmoil. As it explains:
We have long argued that gold is actually a lousy inflation hedge, but a reasonable hedge against a financial meltdown. Perhaps the upcoming anniversary of the Lehman bankruptcy is making the market a bit edgy-with financial stocks selling down hard recently, and with rumors floating through the market of a pending bank or hedge-fund collapse. Such fears may explain why gold is rising even as the other popular “inflation plays”, such as oil, are falling.
Regular readers will know that we do not think the End of the World is upon us. Nor do we think China will be dropping its Treasury portfolio like aerial-bombs onto the market. Long-term, gold has been a poor, negative cash-flow, asset to hold. But there is undeniably some momentum in the market, which could continue to gather pace, as these trends tend to be self-fulfilling, with new gold funds occasioning the need to buy gold, etc. In the short-term, we would not stand in front of this train…
After a short, sharp fall on Wednesday night, amid speculation that the biggest rally in more than five months may spur investors to sell holdings and lock-in gains, gold prices inched back down on Thursday, fluctuating around$974.60 an ounce.
The most likely prospect from here, according to Marc “Dr Doom” Faber, is pronounced volatility – which could see gold prices go either way.
In his latest monthly client newsletter, Faber cites Tom McClellan, editor of The McClellan Market Report, who says that “the coiling of gold price movements implies that we will soon see a ramping up of volatility in gold prices” which could “catch most people unaware”.
Faber agrees, adding: Some big moves in asset markets are coming and I lean toward the view that gold will break out on the upside. The only problem I have, however, is to reconcile my relatively positive view about the price of gold (and other precious metals) with a rebound in the US dollar and a correction in equities. Of course what could happen is first a rebound in the US dollar and a brief correction in gold and equity prices before these short term trends — driven by further monetary easing — reverse, and gold (as well as other commodities) and stocks move up again in tandem.
Perhaps, though, the latest import figures from the Bombay Bullion Association provide some insight, showing that India’s gold imports rose in August from July, but were still down 90 per cent from the same month last year, at 12-14 tonnes – despite usual expectations of surging demand ahead of the Diwali festival of lights.
That suggests McClellan could well be right, but that his predicted volatility will all be on the downside.
Related links:
Fresh bout of jitters sees return to defensives - FT
Gold on hold – what will move bullion? – FT.com Q&A
Doom, boom, greed & fear – what markets should expect next – FT Alphaville