Gold-buying fever continued unabated among the untutored masses
worldwide last week. Imports to India, the biggest gold consumer by
far, were running at five times average levels, according to
investment bank UBS. Chinese smallholders used their May Day
holiday not to head for the beach, as this column naively suggested
last week, but to flood the gold dealers in Hong Kong.
Turkey bought more gold
in April than in any month since the fateful days of August 2008.
And so on.
Were the financial pros back in New York and London impressed by
this spontaneous outpouring of gold love? Not a bit.
The mood in Bloomberg's weekly gold analysts' poll darkened
substantially in the May 2 results: 20 gurus predicted falling
prices, against nine expecting a rise and four abstainers. A week
earlier, the bulls and bears were evenly matched. The latest
figures from the US
Commodities Futures Trading Commission
, published April 30, show swap traders holding nearly twice as
many short as long contracts on gold.
What might Wall Street know that moms and pops in developing
markets do not? One hint comes from an interesting bit of research
published by French bank
last week. It seems - and we should all be thrilled to know this -
that structured finance has infected the ancient art of gold
trading through an instrument known as a "reverse convertible
This involves a financial institution lending cash to an asset
buyer, at an elevated interest rate, but in return granting the
buyer a put option to sell the lender said asset at a pre-agreed
price. Investopedia tells us that RCNs "provide a predictable,
steady income that can outpace traditional returns."
Unless of course the value of the underlying asset falls sharply
and the put option triggers. This is just what happened when gold
started to tank a few weeks ago. "It's hard to determine what was
the biggest cause for gold's decline, but structured products
played a part in exacerbating the downward spiral," BNP's chief of
commodity sales, Guillaume Picot,
But this latest necromancy with RCNs is just more proof of a bigger
picture problem: professional and retail gold buyers are living in
separate worlds psychically if not geographically. The pros measure
gold's performance against that of other assets, particularly
stocks, and stocks have been killing gold for going on two years
(INDEXSP:.INX) has climbed by nearly 40% since Oct. 2011; the
SPDR Gold Shares ETF
(NYSEARCA:GLD) has lost 15%.
At a certain point all but the hard-core gold bugs will give up on
the idea of the metal outperforming. The mid-April market panic
seems to have been that point. All the more so as the main
intellectual argument for gold - that central bank credit expansion
will dilute "fiat" currencies and spur a new bout of monetary
inflation - keeps stubbornly failing to come true.
The retail buyers lining up to grab gold at "bargain" prices don't
care about or trust stock markets, for the most part. In India they
are acting on a time-honored tradition that precious metal is a
woman's mad money, her potential salvation in the event of marital
disaster or widowhood. Gold stashes are passed down from mother to
daughter, or showered on brides as a wearable testament of
financial independence. So consumers will always buy more if the
price looks affordable.
The retail purchaser has the numbers in the world gold equation.
ETF investors sold off 174 tons of metal in April, a record for
them and enough to spur a market crash. But jewelry and
gold-coin/bar buyers scooped up 222 tons in an average month last
year. So a bull run at the shops can easily offset a bear patch on
the Street in terms of raw demand.
But the pros can move the market more quickly with cascading
instantaneous sell-offs of fund holdings or collateral on their
reverse convertibles. Thus the gold price plunged by 13% in two
sessions between April 11-15, and has gained back only half that
despite the masses' positive response.
At the moment the market is in stalemate, having done basically
nothing last week. The near-term outlook would have to be called a
bit bearish. Institutional investors look determined to shave
weightings on gold so long as equities stay buoyant. The retail
frenzy has to calm eventually, especially as India's spring wedding
season is winding down this month.
Two caveats to this modest prediction, though: The "bearish"
analysts in the Bloomberg poll nonetheless expected an average
year-end price of $1,550 an ounce, 5% above current levels. More
important, last time the mavenocracy was so gloomy on gold, in Feb.
2010, it was also dead wrong. The metal proved to be in a
short-term correction and climbed by 50% over the following 18
So go figure.