The gold market appears to have stabilized after the yellow
metal crashed to a two-year low this week. Gold coin and bullion
buyers went on a shopping spree, contending that the sell-off in
the futures and ETF market offers a chance to buy at bargain
Spot gold prices fell to as low as $1,320 on Monday but
rallied to $1,400 by Friday, down 5% for the week.
SPDR Gold Shares (
), tracking a 10th of an ounce of bullion, rallied to 135.37 on
stock market today
. It was down 6% for the week -- the fourth losing week in a row.
Down 12% so far this month, it's on track to book its largest
one-month decline since October 2008.
The World Gold Council, an industry group for the metal,
released a statement Thursday saying this week's sell-off has
sparked an onslaught of physical buying. It saw shortages of gold
bars and coins in Dubai and people paying premiums to spot prices
in Mumbai and Shanghai.
"There is a current disconnect between the paper markets and
the physical market," Scott Carter, CEO of Lear Capital, a Los
Angeles-based precious metals dealer, said in an email. "Japan
has devalued the yen and many are buying physical gold to hedge
against inflation. However, the paper market on Comex is much
larger than the physical market. So even though the price can
drop dramatically, more investors are buying gold."
"Central banks bought 55 tons of physical gold on Monday the
day gold dropped $150," Carter added. "Why would central banks
buy gold other than to diversify away from paper currencies like
the yen and dollar?"
The fundamentals for owning gold as a hard asset or store of
value remains, the gold bugs contend. Governments around the
world are debasing their currencies through quantitative easing
programs, racking up debts and keeping interest rates low.
"The gold 'crash' was not based on a shift in those
fundamentals," John Williams, founder of ShadowStats.com wrote in
a client note. "It most likely resulted from a deliberate action
and/or from a severe systemic distortion, involving financial
and/or fiduciary irregularities."
But the weakness in gold suggests the market doesn't expect
hyperinflation to spawn from global QE. The yellow metal has
collapsed 28% from its historic high from September 2011,
crossing the 20% threshold for a bear market. That's while the
Bank of Japan plans to double the bank's balance sheet over the
next two years in hopes of lifting inflation to 2%. Even the
Cyprus bank bailout failed to rally gold.
"The free-fall in the price of gold could be bad news for
stocks if it suggests that traders and investors are starting to
lose confidence in the effectiveness of QE monetary policies," Ed
Yardeni, president of Yardeni Research wrote in a client
Market Vectors Gold Miners ETF (
) plunged 12% for the week to its lowest price since December
2008. Having lost 26% this month, it's suffered the largest
one-month drop since the 2008 bear market.
pulled $2.7 billion out of commodities precious metals funds in
the week ended April 17, according to Lipper Inc. That's the
group's biggest weekly outflow on record. GLD, experiencing the
group's largest outflow, disgorged $2.2 billion.
PowerShares DB U.S.Dollar Index Bullish (
), measuring the greenback against a basket of major foreign
currencies, was up 0.63% for the week.
Spot silver prices eased 0.4% Friday to $23.18 an ounce.
IShares Silver Trust (
) was down 0.4% to $23.18 Friday. It cratered 10% for the week
and 19% month to date.
Global XSilver Miners ETF (
) was down 15% for the week and 24% month to date.
The Golden Dilemma
This week's volatility is a prime example of how gold is an
ineffective inflation hedge, Campbell Harvey, a professor at Duke
University's Fuqua School of Business, and Claude Erb, wrote in a
research paper released this week titled
"Gold is so much more volatile than inflation that it is an
undependable hedge unless you measure your investment horizon in
centuries," they wrote.
Even after this week's dive, gold would need to drop by 50% to
return to its historic relation to inflation. "Given the current
value of the consumer price index (CPI), the 'gold as an
inflation hedge' argument suggests that the price of gold should
currently be around $780 an ounce."
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