Fast For­ward

Finweek English Edition - - INSIGHT - THE WAY IT the metal recorded its high­est one-day de­cline in 30 years. gold slipped by over $100/oz and headed to­wards $1 400/oz? On 12 April, the gold fu­tures mar­ket opened in New York to “a mon­u­men­tal” 3.4m ounces – about 100t – of gold sell­ing. a furth

has been de­scribed by some an­a­lysts, gold was the sub­ject of “a hit” last week in which

“If you look at the na­ture of the sell­ing, it’s al­most as if it was bombed,” says Chris Hart, se­nior econ­o­mist for In­vest­ment So­lu­tions. “I’m not into con­spir­acy the­o­ries and the like, but you’d have to be naïve not to think the mar­kets aren’t be­ing ma­nip­u­lated,” he added.

The good news is that most an­a­lysts re­main pos­i­tive on gold. “While the re­cent moves in the gold price are un­set­tling, we re­main pos­i­tive on the fun­da­men­tals for gold given that we do not be­lieve that the world’s global eco­nomic prob­lems have been solved,” said In­vestec Se­cu­ri­ties.

So what hap­pened last week when the price of

And had this price, as some an­a­lysts be­lieved, been fac­tored into the price of gold shares for some three months pre­vi­ously?

Im­me­di­ately, tech­ni­cal sell­ing was trig­gered; th­ese are lev­els set by in­vestors that when breached lead to manda­tory sell­ing.

Ac­cord­ing to Ross Norman of Sharps Pix­ley, a UK bro­ker­age,

“This was clearly not a case of dis­ap­pointed longs leav­ing the mar­ket,” said Norman. “It had the hall­marks of a con­certed ‘short sale’,” he added.

The aim of such a dar­ing ‘short sale’ was to prompt oth­ers to panic and there­fore put bear­ish in­vest­ment po­si­tions taken by the shorts “into the money”, as it is called. To gain an un­der­stand­ing of the scale of the trade,

In value, Stag­ger­ing, really.

The im­pact on South African gold shares was pretty dra­matic. At the time of writ­ing, a steady re­bound in the gold price was prompt­ing some re­cov­ery. Yet there’s no deny­ing that lo­cal gold shares had been tak­ing a past­ing all year, partly ow­ing to liq­ui­da­tions in gold-backed ex­change­traded funds. The with­drawal of this money from the mar­ket had al­ready hurt con­fi­dence in the gold price.

As an es­sen­tially mon­e­tary as­set, gold’s success turns on pro­vid­ing an alternative to the dol­lar. The con­tin­ued pres­ence of quan­ti­ta­tive eas­ing, where money is pumped (or printed) into the US econ­omy to stim­u­late con­fi­dence and liq­uid­ity, is the rea­son ex­pec­ta­tions for the gold price were rel­a­tively good. The eco­nomic cri­sis in Cyprus was an­other, not­with­stand­ing the pos­si­bil­ity Cyprus could sell gold re­serves to shore up the na­tional bal­ance sheet. That’s be­cause gold is viewed as a tra­di­tional store of wealth, so con­ven­tional wis­dom states.

If the gold price re­mains rel­a­tively low, how­ever, there’s the ques­tion as to whether SA gold shares will have to ap­ply new gold price as­sump­tions into their eco­nomic models. Is­sues which might re­quire re­con­sid­er­a­tion in­clude the level of mine­able re­serves and re­sources, which could af­fect fu­ture gold pro­duc­tion.

“I f por­tions of re­serves are then ren­dered un­eco­nomic, it could mean less cap­i­tal ex­pen­di­ture in the fu­ture, but less pro­duc­tion growth too,” said a UK gold an­a­lyst who asked to re­main anony­mous.

Said David Davis, an an­a­lyst for SBG Se­cu­ri­ties: “The dilemma is that if the gold price re­mains low and in­fla­tion­ary pres­sures re­main, then the mar­gin will close and that will cer­tainly com­pound pres­sures on re­serves.” Davis has, for sev­eral months, been call­ing on SA gold com­pa­nies to un­der­take sweep­ing re­struc­tur­ing any­way. Even at pre­vi­ously higher gold prices, he thinks in­fla­tion is chang­ing the in­dus­try.

So what now? All eyes on the gold mar­ket, is the an­swer.

Ac­cord­ing to Norman, there’s a stand­off un­der­way be­tween the longs (those who think the price of gold will go up) and those who think it will go down (the shorts).

Both sides have big bets to pro­tect, a po­lar­i­sa­tion in the mar­ket that Norman likens to a tug-of-war. “At the end of the day, it is a ques­tion of who has got the big­gest guns – the shorts have made their play – let’s see if there is any re­sponse from the longs to de­fend their po­si­tion.”

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.