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Gold loses its shine

A dramatic drop in the price of gold this week did not come as a surprise to New Zealand investment experts.

Wednesday, April 17th 2013, 6:00AM 2 Comments

by Susan Edmunds

Gold had its biggest one-day price drop since 1982 overnight on Monday, dropping 9% to US$1361.10 an ounce. That is the lowest trading price since February 2011.

Norman Stacey, of Diversified investments, said the drop was not unexpected but the extent of it had shocked some people.

He recently stopped advising investors to purchase gold. “The reasons for gold to be appreciating have passed.”

Gold is an investment people turn to during times of financial crisis or strong inflation. Stacey said serious inflation was still a way off yet and global conditions had calmed somewhat\

But Charles Drace, of Charles Drace Investment Consultancy, said people should not read too much into the decline.

His firm had held on to bullion but also taken short positions in the market. “We had them in place before the big drop because we wanted to cover both ways.”

Drace said it was likely that increased demand due to the cheaper price would push the price back up. Investors were still seeking safety and quantitative easing by governments prompted people to look for inflation-proof investments, he said.  “We view this as just another correction to pull gold prices back to a reasonable range, before they start growing again.”

Pathfinder has an allocation of 4% to gold in its commodity fund. Spokesman Paul Browney said there were rumours large sell orders, worth up to US$15 billion in one hit, had been placed on the New York exchange yesterday. "Once the selling starts people have to cut positions to preserve their equity."

He said a catalyst may have been the headlines out of China showing lower growth than expected. "But other figures there are quite positive."

Browney said it was likely gold prices would soon find their base. “The first wave of selling will have shaken out those who needed to be shaken.”

Prices bounced slightly last evening in Asian trading. "Although they are still pretty low."

Capital Economics, in Britain, issued a statement saying  the trigger for the slump in the gold price was aggressive selling by speculative traders, rather than any change in the fundamental drivers.

“Gold has also been caught up in the broad-based weakness in commodity markets, including oil and industrial metals, due to softer US and Chinese data. Once trading calms down, we expect gold to stage at least a partial recovery.

Stacey said gold was still lucrative to produce and miners would not be going out of business any time soon. “There would be very few producers that have production costs near the current spot price of bullion.”

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Comments from our readers

On 17 April 2013 at 12:48 pm Paul Brownsey said:
Gold can be viewed very emotionally by some investors, when in reality it is just another investment option with specific characteristics, like any other investment option. The following is a guide to the thinking of "Gold Bugs" from www.ritholtz.com, the website of financial advisor and commentator Barry Ritholtz:


The Rules of Goldbuggery

1. Gold is a Currency: This is rule number 1. It is not a decorative or industrial metal, it is a permanent store of value, as dictated by Greeks in Lydia around 700 B.C. And, it shall be ever thus.

2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of Central Bankers and politicians. Its a conspiracy, and we know who the guilty parties are.

3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise: This is the corollary to the prior Rule of Gold manipulation. Gold runs up despite the overwhelming opposition to it.

4. The world MUST return to the Gold Standard one day: It is inevitable that we will return to a Gold Standard. We all know this to be true. When we compare the size of the money supply to past amounts when there was a Gold Standard, we can derive prices of Gold in the $7,000, $10,000 even $15,000. Hence, we know its cheap even at $2,000.

5. Central Bankers are printing money relentlessly, and this can only drive Gold prices higher: NOTE: You must ignore, for the moment, that Gold has not gone higher for the past 2 years as Central Banks around the world have ramped up QE. This only means that ultimately, Gold will go much much higher.

6. Gold works whether the economy is good or bad: When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!

7. Gold will survive after the world economy crumbles: Gold is the ultimate currency, as it has a value that will survive even after the whole world tumbles around you. Get yourself some gold coins and a Glock and you will be just fine when the whole world goes to shit. We welcome the era envisioned in the movie Mad Max.

8. Never admit that Gold is essentially a sucker’s bet: Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008.

9. Gold is a rejection of government, and their control of fiat money and finance: There are no printing presses that produce gold, it is finite, natural and God created. How much we scrape out of the ground each year is limited, and the only variable to the old equation. (Just ignore Man’s natural tendency to organize into to City-States over the past 12,000 years).

10. All Gold discussions must contain ominous macro forecasts: Your description of why Gold is going higher must consist of spurious correlations, unprovable predictions, and a guarded expectation of bad things int he future. Avoid empirical data at all costs.

11. Gold is always rallying in one currency or another: Sure, it may be down 30% in Dollars, the reserve currency it is priced in, but you can always find a currency falling faster than it does and claim you own it in that denomination. Last week, it was up in Japanese Yen. This week, it is up in Zimbabwe dollars.

12. China & India know the value of Gold; the Western world does not: The massive buying of gold by consumers in Chindia reflects the culture, intelligence and investing savvy of the people in these countries. The West doesn’t get it, and it is their loss.

Bonus rule: Never admit Gold might be falling because it trades on human emotions and psychology and has no intrinsic value whatsoever.
On 17 April 2013 at 4:20 pm Walkdontrun said:
Interesting that No. 10 is the exception that proves the other rules.

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