The implications of Gold's sharp sell off

The dramatic fall in gold price has continued on Monday, with the price passing below $1,400 and heading as low as $1,390. Many investors, particularly retail investors, are often slow to react and it could be that Friday and Monday morning's sell off were just the start and we see further selling this week.

Short selling of gold, which has passed through various support lines, is also likely to increase and just adds further fuel to the flames, which are currently sending gold into meltdown! So what does all this mean for the wider world? Well obviously holders of gold bullion are going to be hit hard, with prices down over 10% from Friday. Gold mining stocks are also likely to be hit very hard, as many are a leveraged play on the gold price, and we have witnessed this today with many gold stocks down double digits already. The logic for gold miners falling in value is fairly basic; the price of the good they are selling falls, and assuming costs stay the same their margins are therefore eroded and so profits are likely to fall, all in all making the stock less attractive on various valuation techniques.

The question is just how low can gold go? Has it been oversold and is now a buying opportunity? Well this is probably the hardest question in investing. Equities and bonds can often be quantifiable, with companies have earnings (or predicted earnings) and cost structures that allow investors to generally determine fair value. Gold however, has no real economic value and so determining what price is fair value is very hard, and this is why, I suspect, gold will continue to fall further as sentiment is particularly important with the precious metal.

Factors driving the price back up are also harder to work out. Recent events such as Japanese Quantitative Easing, or North Korea tensions have historically been supportive of gold, but not of late, which does raise the question has gold lost its shine?

Gold Price Tumbles!

Gold, along with many other commodities have been hit very hard today. As I'm writing this gold has broken through the $1,500oz to stand at $1,498oz, which equates to over 4% loss for the day - a huge downward movement.

There's been a couple of big announcements this week that have contributed to this fall. Today, Goldman Sachs downgraded their long term price view, and we all know the weight with which Goldman can influence markets!

Cyprus has also announced plans to sell gold bullion in order to help them meet their debt burden. This means there is a lot of supply hitting the market, lowering price. Quite why Cyprus announced their intentions to sell before actually selling is a strange one to me, rather than sell and then let the market know! Maybe they have short positions on gold!!

By breaking through resistance lines such as $1,500 it could encourage further selling and the price continue to fall.

Long term holders will of course still be up in their investment in gold, but over the past 2 or so years the gold price has fallen significantly and maybe losing its shine with investors!

With the selling that is currently occuring in the market place it will be interesting to see who the buyers are? Many Central Banks have large gold reserves already and may be deterred from adding to this. Jewellery demand, particularly from China and India can be seasonal so this may not produce the immediate demand required to help stabilize the price.

North Korea - is it different this time?

This week has seen tensions escalate between North and South Korea, with North Korea declaring they are in a state of war with South Korea.

North and South Korea have been at loggerheads for over 60 years and it could be that this latest flair up is simply 'tough talk' from North Korea and the situation passes without any implications. North Korea has also become very vocal towards the U.S. and this week ratified a law regarding "counter-actions" against the U.S. which includes a nuclear strike. They also plan to kick-start their old nuclear programs. So is it different this time? Well the answer we hope is "NO"! This is simply North Korea flexing some muscle as they like to do, and no military action will occur. Both the U.S. and South Korea have been fairly quiet, which is a good sign and there does not seem to be any out of the ordinary deployment of troops by North Korea.

Nevertheless, tensions like this can spook markets, and that has happened with the South Korean market falling to five month lows, and the currency depreciating. Other risk (equity) markets around the world have also slipped which may be partly due to the uncertainty around the situation. In general wars, terrorist strikes or severe threats lead to equity markets falling off. Safe haven assets may provide investors with some solace during these times, and gold could be a good answer, although of late that hasn't proven the case with the gold price falling to YTD lows (Gold).

Geo-political trouble is always hard to quantify when purchasing stocks but it is important to be aware of possible conflict and make sure the reward is worth the risk.

Hopefully this will all blow over with no violence, but it is definitely something to keep an eye on! 

(Does anyone have a spare Nuclear bunker lying around?)

The Curious Case of Gold Bullion...

Cast your mind back to August/September 2011... During these volatile months Eurozone concerns regarding Greece escalated and many thought their exit from the Euro was imminent. Gold bullion, a safe haven asset, rose significantly in value over this period, with the price souring past $1,900oz in September 2011. At the same time other safe haven assets such as U.S. Treasuries and UK Gilts also rallied strongly with yields falling considerably during this period.

So what I've found interesting recently, particularly since the Cyprus bailout fiasco is the behaviour of gold bullion. Price has been stable, around $1,600oz but not provided that same protection to portfolios as it did in the summer of 2011. So what does this mean for gold's status as a safe haven asset? Well firstly it should be noted that the Cyprus bailout is less significant than Greece, and nearly 2 years on from summer 2011 the rest of the global (except Europe) economy is in a better state, so investors may not feel they need this safe haven asset. Secondly gold has other purposes than being simply a safe haven asset, it is also an inflation hedge. It could be that investors see QE coming to an end, particularly in the recovering U.S. and so inflationary pressures may ease, hence their reluctance to buy lots of gold.

For me however, I do think at this point in time gold could be a useful safe haven asset in portfolios. Other safe haven assets such treasuries and gilts are at low yields and thus you have to pay a premium for protection from these assets. Conventional government debt does not offer inflation protection, that gold should hopefully do. Coupled with this, demand from China and India for jewellery is significant and growing, and central banks continue to demand the yellow metal, to diversify away from their foreign currency reserves.

At the start of 2013 we have seen outflows from many gold ETFs, but for me this is a little premature. I'd consider holding gold until the economic landscape becomes a lot clearer and I am confident inflation will not rear its ugly head. Until then this asset, which is normally lowly correlated with equities, could be a useful position in investors portfolios...

Have Gold Equities lost their shine?

Historically gold equities have exhibited strong positive correlation with the gold price. However over the past few years a disconnect has become apparent, with many gold equities falling off a cliff.

Now to try and understand whether this gap will converge or continue to diverge we need to try and work out what has driven the gold price and what has issues have faced the gold miners.


Physical gold has always been seen as a safe haven asset and investors have moved to it in times of economic and political uncertainty. As a 'real' asset it is also seen as a store of value and an inflation hedge. Since the credit crunch we have witnessed extreme economic and political pressures and uncertainty, coupled with tremendous quantitative easing; almost the 'perfect storm' for gold, and as such the price rose dramatically from 2009-2011.