Suppose you had your house on sale and were finding no takers.
You cut the price by 10% or 15%, and the next morning find buyers
lined up around the block. You might think you had found the right
price for the asset, or overshot a bit on the downside.
A similar situation persists on the world gold market after the
metal's worst week in memory - sort of. Gold's value as measured by
SPDR Gold Shares ETF
(NYSEARCA:GLD), plunged 13% from April 11-15 before rebounding
slightly later in the week. The metal's value has dropped 22% from
a high in early October.
The cataclysm brought out buyers in droves, not among the pros on
the COMEX or London Metals Exchange, but in places like the Perth
Mint in Western Australia. "We had a large crowd outside our doors
on Monday morning after the market meltdown, and all of them wanted
to buy," Mint treasurer Nigel Moffatt told Bloomberg TV.
Similar scenes unfolded across the globe, particularly in China,
India, and other burgeoning Asian nations. "People are actually
buying everything, gold bars, gold coins," Brian Lan, managing
director of GoldSilver Central in Singapore, told Reuters. "People
are rushing to get a hand on it."
Does this spontaneous mass mom-and-pop affirmation of gold's value
matter compared to the bearish calculations of investment bank and
hedge fund experts? Actually it does.
Unlike stocks or bonds, gold leads a vital physical existence.
Buyers derive pleasure out of wearing it, presenting it to their
beloveds, or stockpiling hunks of it in their strongboxes in the
event of social catastrophe. Unlike oil or copper, most gold buyers
are individuals or small businesses that intimately depend on
individual consumer sentiment.
Some 43% of world consumption last year came from jewelers,
according to the
. The next largest chunk, 29%, was buyers of coins and bars.
Central bank purchases have
skyrocketed in recent years
to reach 12% of the market.
, though beloved by financial journalists, bought just 6.3% of the
world's gold in 2012.
As with other commodities, the physical trade in gold is mirrored
by a futures market controlled by professional traders and
investment houses. Usually the two are roughly in sync, current
demand trends logically shaping traders' bets on future prices. But
this is not a usual moment for gold. Physical buyers and futures
speculators are showing that they come from different worlds, and
are reaching different conclusions about the metal's current price.
"Never has the gold market been so deeply divided," says Ross
Norman of London-based broker Sharps Pixley.
The professionals (and ETF-investing retail minority) compare gold
with other securities options, and have decisively soured on it.
Wall Street-style arguments for overweighting gold have been
diffuse. But the core one - that central banks' "debasing" of
"fiat" currencies would lead to runaway inflation and a concomitant
rush into gold as a store of value - has not panned out yet, and
does not look likely any time soon. A cascade of bullion-bearish
analyst notes this week sounded an almost plaintive note of
disillusionment. Clients "point to intense disappointment with
gold's failure to rally significantly even during periods when the
stars were supposed to be aligned in its favor," wrote Edel Tully
of UBS. "Negative feelings toward gold dominate."
The masses lining up to buy gold bars in Perth, Hong Kong, or
Mumbai do not believe in stocks or bonds, or often even in banks.
They likely shift their "weightings" between US dollars in cash
form and gold, and now clearly think the latter is a good trade vs.
the former. The number and wealth of these retail gold enthusiasts
in the developing world has increased enormously since bullion went
into its last prolonged funk in the early 1980s, changing market
dynamics for the better. The fact that central banks are buying
rather than selling is another major difference between then and
In the immediate term, the outlook for gold looks like a stalemate.
Pessimists and boosters are not actually so far apart in their
concrete price expectations. For all its hurt feelings, UBS
expects bullion to settle
at $1,400-$1,450 an ounce. The COMEX price at the moment is just
below $1,400. Marc Faber, a contrarian hedge fund manager who
extolls the current gold crash as a buying opportunity, nonetheless
may dip further
to $1,300 before climbing again.
For financiers, the only more or less solid correlation for gold in
recent years has been a negative one with the dollar. If the
greenback keeps climbing against the yen and euro, as it has for
most of this year, it will make a gold recovery that much more
difficult. On the retail demand side, the market to watch is
gold-obsessed India. If the economy thrives there and official
efforts at taxing down imports fizzle, the market will get an
The main takeaway of the last week, though, is that gold maintains
its millennia-old mystique for broad and increasingly rich swathes
of humanity. That will put a brake on the cold calculations of
managers in the great money centers.