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Gold bugs are being crushed. The price of the yellow metal has fallen to five-year lows, briefly trading below $1,100 per ounce on Monday after declining as much as four per cent during Asian trading. While there was no particular news to explain the day's price drop, the slide can easily continue, if in a more measured fashion.
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Consider the reasons for buying the yellow metal. Some investors believe it is a safe haven. Concern that Greece might exit the euro zone has helped limit the recent decline. Although the dollar-denominated price of the yellow metal typically falls when the greenback gains, gold prices were broadly steady in June even when a traded index of the dollar's value was rising. Now Greek tensions have abated.
Fears of inflation and deflation are another motivation for buying gold. There are no signs of either.
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Without fewer existential worries, investors can focus on the prospect of the first tightening in US monetary policy since 2006, and the retreat of negative yields in the euro zone. Under the circumstances, gold's zero return before storage costs looks distinctly unattractive. Besides, rising American interest rates presage a strong dollar, which still tends to lead to weak gold.
Then there is China. On July 17, Beijing offered a rare glimpse into the size of the gold holdings in central bank vaults, revealing that it had added 604 tonnes of gold to reserves since 2009. That is hardly the vote of confidence gold enthusiasts were looking for. Gold's share of China's reserves has dropped from 1.8 per cent to 1.65 per cent since June 2009. Nor have analysts found any sign that the recent rout in Chinese equity markets is luring private domestic investors into the supposed relative safety of gold.
There are so many reasons to sell and so few reasons to buy. Die-hard gold bugs face tough times.
