Gold's Gory Crash, One Year On
Friday, 4/11/2014 18:38
Gold price crash or massive Asian investment? Certainly redeployed available metal...
A YEAR AGO this Friday,
writes Adrian Ash at BullionVault, a leaked IMF-EU paper told Cyprus to sell a chunk of its tiny gold reserves.
It never did. No Eurozone central bank has sold gold since France quit in 2009. But already advised that week to sell short by Goldman Sachs, the market took fright.
No one owning gold or silver in April 2013 needs reminding of the gory details. (
Horror fans will find gold's $1 trillion crash explained here.) But with hindsight, and without the need for valium, three points deserve comment today.
#1. Gold met
very strong demand last April. Just not in the form of financial securities or derivatives traded on Western exchanges. So while the spot price "gapped down" on the morning of Monday 15 April, 2013...with few buyers daring to catch it...the surge in China and India's retail bargain-buying clearly put a floor under the market.
#2. Such wrenching shifts in price, and also in who owns what gold where,
changed the gold market's dynamics, of course. Price aside, the 2013 sell-off by Western investment funds was just as much a huge investment purchase by Asian savers. So to serve those respective customers better, the bullion market has re-deployed its available stockpiles.
Some odd things result...
- Sitting between the world's clearing house of London vaults and the end-buyers in Asia, the refinery industry in Switzerland is well stocked today. Part of their core business is taking in large 400-ounce wholeale bars to produce more consumer-friendly kilobars (and at the more Asian-friendly purity of 0.999 rather than London's standard 0.995 as well). Today, Swiss refineries are asking lower premiums on those smaller units than 6 months ago;
- Spring 2014 sees China now over-supplied, with Shanghai prices offering a discount to the world's benchmark of London settlement. More usually a premium – and peaking at $50 per ounce above London spot prices to suck metal from West to East in mid-2013 – that discount has now lasted for 7 weeks and cut as deep as $9 per ounce, by far the biggest anomaly since at least January 2012. Demand is seasonally low this time of year anyway. But reports of slower imports to the world's No.1 buyer shouldn't surprise anyone over the next few months;
- There's also plainly more metal to hand in India than during the crash. Because again, the local premium to London prices has retreated. With 10% import duty to account for first, it's dropped from an insane $175 per ounce to a merely crazy $60. The reason? Smuggling has leapt, defying the government's effective ban on new imports with up to 200 tonnes sneaked past customs officials on one serious estimate;
- Because China has plenty of metal right now (it is the world's No.1 miner, after all), US depositories are gathering metal as well, reversing the outflows of July-December 2013. North American miners, notes consultancy Metals Focus, have come to rely on Chinese gold demand. But now they find their eastern buyers well served during the seasonal lull, they're having to stockpile gold – if only a few tonnes so far – closer to home.
- London, in contrast, the heart of the world's wholesale gold trade for 250 years, is showing signs of tightness. Because gold borrowing costs are ticking higher. Again, it's not dramatic just yet, a mere fraction of one percentage point. But contrary to standard practice, lenders of gold have asked borrowers to pay them for short-term loans on as many days as not so far in 2014. Usually they have to offer the gold borrower an incentive instead. First because gold borrowers need to pay storage fees and miss out on cash interest payments for the duration of the loan. Second because London is normally so well-stocked with gold that lenders have to join the line. But not today.
#3. Albeit perversely, last year's crash also
proved gold's insurance function, forcing through almost half of last year's 30% price drop. That loss mirrored the boom in world and particularly US equities, as our
asset performance comparison table shows. Today that boom is now being compared with the S&P's bull market ending October 1987, and while many "scary charts" linking today with Black Monday look stretched, equity valuations are stretched further.
Gold's two-day crash in April 2013 wasn't its worst percentage fall (that was January 1980, just after its famous $850 top). New York's Dow Jones stock index lost twice as much in the Great Crash of 28-29 October 1929. The London stock market matched last year's gold drop in one session alone in October 1987. Back then, UK shares dropped another 12% the day after Black Monday as well.
So yes, gold can be volatile. No, it won't protect you from wrenching losses or sleepless nights. Last spring's crash was horrid. But stockmarkets can be worse. Gold jumped 5% on Black Monday 1987, and it rose 5-fold in terms of the business assets it could buy during the Great Depression that followed the 1929 crash.
Investors wanting financial insurance might want to get some before the rush. It is, after all, much cheaper than early April last year.
Email us