Gold Losing Safe-Haven Shine

Gold’s performance in 2013 resembles the eastern slope of Mt. Kilimanjaro. Traders who are still nursing long positions would prefer that their Gold charts look more like the western slope of Africa’s highest peak, or at least be rangebound like the summit.

The stats are downright ugly. Spot Gold is off 21.3% year-to-date and is off 31.3% from its peak in September 2011. After thirteen years of annual price gains, Gold appears poised to end 2013 on a down note unless there is a major pick-up in activity in Q4.

Gold has historically been purchased as a safe haven during periods of elevated geopolitical uncertainty. Rather than appreciating yesterday when the US government shut its doors for the first time in seventeen years, Gold tumbled nearly US$ 40. After reaching a multi-week low of US$ 1278 earlier today, Gold has retraced higher and tacked on about US$ 35 in value. Rather than a depreciating market, perhaps this type of volatility will be welcomed by speculators. Metals market masses, what sayest thou?

The closure of the US government has been discounted for weeks, and yet Gold has squarely been fixated on the eventual taper of the Fed’s “QE3” program instead. We understand the thesis quite well: less Fed-generated liquidity in the markets translates into less investment and trading capital for higher-risk assets like Gold. We’ve seen some perceptible reactions in Gold in recent weeks to geopolitical hazards like the Syrian crisis, but those remained short-lived and attention reverted back to the paring of the Fed’s US$ 3.6 trillion balance sheet.

Central Banks And ETPs Scaling Back
Central banks purchased an estimated 534.6 tonnes of physical gold in 2012, up from an estimated 465 tonnes in 2011, the largest amount in 48 years. Monetary authorities have drastically scaled back their official purchases this year, however, as central banks have been less inclined to shift foreign reserves into Gold in the current market environment. Holdings in Gold-backed exchange-traded products (ETPs) are at their lowest levels in three years, declining nearly 27% this year to their lowest level since May 2010 with approximately US$ 61.8 billion market value wiped out. SPDR Gold Shares, the world’s most popular Gold ETF, has seen its market value reduced to approximately US$ 37.5 billion as of early October.

Mixed Consumer Demand
India is the world’s largest consumer of Gold and purchases by consumers in that country are forecast to decline about 5.3% this year to 800 metric tonnes through March, compared with about 845 tonnes one year earlier. India is battling a record current account deficit and raised the tax on gold imports for the third time this year in August to reduce demand and strengthen the beleaguered Indian rupee.

In the U.S., the U.S. Mint sold about 13,000 ounces of American Eagle Gold coins in September, down from 68,500 ounces in September and significantly lower than the 209,500 ounces sold in April 2013.

In China, People’s Bank of China indicated it may permit more companies that produce more than ten metric tonnes of Gold annually to become involved in importing and export Gold. China is on course to become the world’s largest Gold consumer in 2013 with consumption expected to increase by 29% to about 1,000 tonnes. Coupled together, China and India account for more than 50% of global Gold demand.

In the Middle East, the United Arab Emirates is expected to become a more popular Gold trading centre. Dubai accounts for approximately 25% of trade in physical Gold, and more than US$ 70 billion in Gold traded there last year. Dubai is ideally situated between large consuming countries and Gold-
producing countries.

Fiscal Cliff 2.0
Gold faces its biggest test on the geopolitical front in the fourth quarter. The closure of the U.S. government will persist for an unknown period of time, and the U.S. government’s ability to borrow will cease around 17 October when the debt ceiling is reached and other “extraordinary measures” that have kept the government afloat since May are exhausted. Political gridlock in Washington, D.C. has historically been positive for Gold. Inflation officially remains muted in the U.S. and Europe and certain sectors of the economies in the U.K. and the Antipodes are struggling with bouts of inflation. Japan is trying to engineer inflation to escape more than a decade of deflation. The metal’s shine will be put to the mettle over the next few months.