It looks like another group of gold traders and investors has thrown in the towel today. Yesterday on news that the Federal Reserve would taper its $85 billion in monthly asset purchases to $75 billion gold fell below $1,200 an ounce to a five-month low.
Today gold (February 14 futures on the Comex) has dropped another 3.2% (as of 2:30 p.m. New York time) or $39.20 an ounce to $1195.30.
It sure looks like some traders, who had been holding onto their gold positions in the hope that the price of gold would climb on news either that the Fed had decided not to taper or that the taper would be very modest, are selling today. The logic to being long gold ahead of the Fed’s decision was that the market would see either a no-taper or small-taper decision as likely to produce inflation—which would lead to an advance in gold prices. With the price of gold dropping on what was indeed a very modest taper, this argument for holding gold is done, cooked, out of here.
Selling does look like the best decision in the short term since the downward trend in gold—with futures down 36% from the September 11 record of $1,923.70—is still in place. And it’s not clear where it stops. I’m hearing $1,000 an ounce frequently but I don’t know if that’s based on anything other than $1,000 being a nice round number. Certainly markets have a tendency to defend round numbers—such as $1,000 an ounce—but that doesn’t mean they always successfully defend them.
In the long term, however, the picture looks very different with the supply of gold falling. At $1,195 the price of gold is below production costs for many mines and the mining industry is cutting production, reducing development budgets, and cutting exploration. The mining sector in South Africa is a mess and the labor and production problems there aren’t getting better. Gold ore grades continue to decline, pushing up future production costs. And the Chinese government looks like it is the source of much of that country’s recent gold buying binge.
Why is the question of who in China is buying gold so important for the future of gold prices? Because while individual investors are relatively likely to sell any gold they’ve purchase back into the market when prices climb, a Chinese government looking to diversify its holdings away from U.S. dollars is likely to sit on its gold. Government purchases thus, more than individual buying, tend to reduce the global float in gold. Think of this kind of buying as equivalent to a purchaser burying gold in the back yard—and keeping it buried.
The Chinese government hasn’t updated its published figures on its gold holdings since 2009 but commodity analysts think China may have purchased as much as 300 metric tons—not ounces– of gold in 2013. In the first 10 months of 2013 gold exports from Hong Kong to China—one indicator of Chinese purchases—have climbed by 376 metric tons over the first 10 months of 2012. (This high level of gold imports comes even though China is the world’s biggest producer of gold.)
If you’re looking for a turning point in gold prices, it might make sense to target the day when China again reports its gold reserves. A number significantly above the 1,054 metric tons the People’s Bank reported back in 2009 could be enough of a surprise to spark a rally.
Unfortunately, I don’t know of anyone who knows when (or if) China might report new number for its gold position.
The “when” for any rally in gold remains a huge unanswered question.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
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