Golden hedge gets severe trim
Global turmoil has failed to put the shine back on the metal, down 40% from latest peak
As world gold prices plunge to a five-year low, a local expert says many Kiwi investors will hold out — and not sell until prices regain some shine. Gold is often seen as a hedge against high inflation, which erodes the value of money, and is priced in US dollars, which means its value tends to rise when that currency is weaker.
Gold slumped US$25 to US$1106 an ounce on Monday — 40 per cent down from its latest peak.
The US dollar has rallied in recent months, which typically takes the shine off gold, driving the price of the precious metal lower.
Tumult in China’s share markets and the Greek debt crisis have also failed to restore its appeal as a haven from global turmoil.
The price of gold surged in the years immediately after the 2008 financial crisis, topping out at nearly US$1900 an ounce in August 2011, as investors anticipated that the Federal Reserve’s ultra-low interest rate policy and huge bond-buying programme would undermine the dollar and lead to high inflation in the United States. But that didn’t happen. Instead, inflation has remained subdued and its economy kept recovering, which has strengthened the US dollar.
New Zealand Bullion Depository’s chief operating officer, Michael O’Kane, said there was wholesale local interest in gold around five years ago when the market was high.
O’Kane said many of these people will hold on to gold and wait for prices to lift. “Talking to people on Monday, they’re not worried about what the price is doing right now, they’re just curious as to why . . . the majority of people I deal with aren’t buying it as a speculative item,” he said.
“In New Zealand dollars we’re looking at $1675 an ounce. At its height it was about $2200 . . . most people who are buying physical gold don’t look to turn it around in a 24-hour period, they’re buying to hold for five, 10 or 20 years.”
O’Kane said he was “quietly confident” gold prices would go back up.
“It won’t happen this year, it might not happen next year but it will eventually start to pick back up as inflationary pressures bear back on the global economy.”
When investors are worried about the outlook for the US and the global economy, they tend to favour gold. But when the US stock and bond markets are strong, as they are now, investors don’t really see a reason to hold gold which, unlike stocks and bonds, doesn’t produce any income.
On top of this, all signs point to US Federal Reserve chairwoman Janet Yellen lifting the benchmark interest rate, which has been near zero since December 2008. This is adding to the upward pressure on the US dollar.
An increase in yield helps any currency, said Auckland-based Alex Hill, head of Corporate FX at NZForex.
“Hence why we’re seeing the Kiwi dollar . . . performing so poorly at the moment with so many rate cuts built into the market’s expectations in the next six to 12 months,” Hill said.
“The other side of the coin is the safe haven aspect to the US dollar. With global uncertainty, especially what’s been happening in Greece and the Chinese stock market, and just general economic conditions in these commodity-currency economies looking a bit worse for wear there’s liquidation of those so-called risk assets and a run towards the US dollar.”