Gold falls to 5-year low as investors exit

The gold prices slumped to `25,750 per 10g on November 5 as the US Federal Reserve finished its quantitative easing program, the Bank of Japan stepped up its own, and the US dollar strengthened. 

The price of gold hit a five-year low in the first week of November on account of an heavy pullout by investors, to divert their funds into riskier assets following expectations of an interest rate rise by the US Federal Reserve on strong recovery in the American economy. Earlier, gold had already lost ground for four-straight sessions, culminating the fall of up to 3.1 per cent to a four-year low of $US1161.75 an ounce on October 31. On Monday, the precious metal was down 0.3 per cent at $US1169.20 in late Asian trade.

Gold is currently passing through a triple hit a strengthening dollar, strong recovery in the US economy favouring global equity markets and a sooner than expected rise in US interest rates. The Japanese government’s decision to pump fresh money into the system has also threatened gold’s appeal as a safe-haven investment avenue. Gold still remains highly correlated to the US dollar and the Bank of Japan’s unexpected move to expand its yearly asset purchases by trillions of yen has only exacerbated that, Australia and New Zealand Banking Group commodity analyst Victor Thianpiriya said.

However, there is a key difference to gold’s slump and the US dollar’s rise in 2014 when compared to last year. “The US dollar was still strengthening last year as well, everyone was getting optimistic, bulled up positive on the US and that was driving down the price of gold, but the demand response we got from the Chinese last year on the physical side really stopped gold from going lower than it did and we really saw some strong bounces in the gold price when it got sold off,” he said.

“That hasn’t happened this year, we’ve seen particularly over the last few weeks that Chinese onshore gold demand has weakened significantly this year compared to last year and I think that’s a result from a bit of a hangover from the gold binge last year from the Chinese.”  With physical demand weak and gold ETFs [exchange-traded funds] being sold off, it’s hard to imagine any strong bounce in the yellow metal’s price, Thianpiriya said, however, 2015 may see a slow recovery.

“For the moment, we’re still quite comfortable with our outlook for 2015 which is $US1180 for the end of this year and a bit of a gradual recovery back through the $US1200s for most of 2015,” Thianpiriya said. There is a lot of optimism priced into the US dollar at the moment and once the US central bank begins to raise rates, presumably some time next year, a stabilising greenback will be positive for gold prices, Thianpiriya said.

The US dollar is only one side of the story, UBS commodity analyst Jo Battershill said.
“It’s almost like the paper markets in the US are looking at what’s going on in the ETF and what’s going on with the US dollar, but not looking at the other side of the equation. Clearly, it’s being sold out of ETFs but it’s being bought by someone.”

Gold hit the lower end of the cost of production, widely estimated at $1,150 an oz. At this level, we expect more miners will come forward for panic selling. But, perhaps investors are awaiting the outcome of the European Central Bank (ECB) meeting scheduled for Thursday. Widely, expectations are that ECB will announce a stimulus for the region’s economies to recover from a steep downturn. Once this is announced, inflation in the European region will go up. With surplus money in hand, gold will see some buying as a hedge against inflation, to take gold at $1,175 an oz,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

Courtesy: Business Standard & Reuters