GOLD was the word on everyone's lips last week as, over the weekend, the price
collapsed by nearly 14 per cent.
According to Deutsche Bank, this is the fifth largest two-day slump since
records began in 1920. The gold price has been on the slide for a while, so what
spooked gold so badly last week? Investors in this commodity have set fairly
aggressive stop loss limits of around $1,400 to $1,500 an ounce and they became
forced sellers when the slide took pace.
The Wall Street Journal reported that as much as $1bn had flowed through
Exchange Traded Funds, the third largest outflow since inception. The amount of
trade was seven times the daily average and the heaviest on record.
In addition to automatic trading came weaker Chinese retail demand. Furthermore,
Cyprus mentioned that it might have to sell part of its gold reserve to raise
$400m and this may prove to be the template for many highly-indebted countries.
Thirdly, recent economic data in the Eurozone and the US has been a little
weaker of late, causing speculation that gold may lose its shine as a hedge
against inflation. Just consider that for a moment, because central banks have
been pumping vast amounts of money into the system to reflate economies and many
are now questioning how effective these quantitative easing programmes have
been.
It has undoubtedly been very good at boosting liquidity, profitability and
hiding the cracks in a very poor banking system, but for the wider economy the
jury is still out.
There is a technical floor to the gold price at $1,300 an ounce as this is the
cost of production, and this could prove to be important.
Some holders of gold will see the recent price movement as disappointing, with
the threat of ejection of Cyprus and others from the Eurozone, depositor
haircuts, capital controls and monetary easing not seeing the precious metal
meet new highs. Buyers of gold will see this as a brilliant opportunity to
acquire more.
Away from gold, Tesco last week announced that it was withdrawing from the US,
writing down the value of some Eastern European assets and moving away from the
megastore format. All a bit late, but undoubtedly a step in the right direction.
Expect some softness in the share price while the market digests this news but
there may still be an opportunity here.
