It hasn’t been a great time for gold over the past few days. Some people are even calling it a slaughter. And with gold futures GCM3 -0.40% on Monday experiencing the biggest one-day percentage drop since February 1983, it’s fair to say that something drastic has happened to the metal, traditionally perceived as a safe haven. Read: The day gold died
The exact reason for the harsh selloff has been up for debate the past couple of days, but HSBC’s chief commodities analyst James Steel points to not just one but six reasons for the plunge. Read: Goldman sees more downside on gold selloff
“The assumption is that it offers both a disaster and an inflation hedge. With the gold price plummeting and volatility rising, this notion is now being severely tested,” he said in a note.
1. FOMC minutes -– the minutes from the Fed’s March meeting showed some members favored an early end to the central bank’s asset-purchase program, and the minutes were “ostensibly gold-bearish”.
However, most data have recently missed expectations pointing to a slowdown in the economic recovery, which should have mitigated the damage to gold. “Even if the economy cannot be described as performing well, it appears to be past the crisis period of recent years. The reduction in the possibility of a ‘tail risk event’ may be undercutting safe haven demand for gold,” Steel said.
2. A shift out of commodities and into equities and bonds –- there has been overall weakness in commodities this year, and the reflationary policies from central banks, including record low interest rates and massive balance sheet expansion, appear to have boosted other financial assets such as bonds and equities. This could also explain the switch away from gold. Read: How long can gold and silver go?
3. Ongoing ETF liquidation –- a solid appetite for gold ETFs has been one of key drivers for gold’s rally since 2004, but now hedge fund liquidation has noticeably reduced ETF holdings.
4. The Cyprus impact and fears other countries may start selling gold -– Cyprus is looking to sell 10 tons of gold to find cash for its bailout, which raised the likelihood of wider central-bank selling. Cyprus may only have small gold reserves, but the combined gold reserves of the euro zone are substantial. “We do not believe that even if Cyprus acts other central banks will follow. In any case these countries are party to the Central Bank Gold Agreement which limits central bank gold sales,” Steel said.
5. Massive easing measures from the Bank of Japan –- the aggressive easing measures in Japan are not necessarily gold bearish, but “one possible explanation for gold’s decline is that these policies will export Japanese deflation. While this may not be a valid explanation it is entirely possible that the lack of global inflationary pressure is working against gold,” Steel explained.
6. Breaking key trading levels -– gold prices broke below $1,525 an ounce last week and quickly dropped to the $1,500 mark. These were important technical support and psychological levels respectively.- Sara Sjolin
Source: Bullion Bulletin