Global upturn drives down the price of gold

THE precious metal's falling price is a sign the global economic revival is real.

gold

ATTENDING a global investor presentation earlier this week I was struck by the fact every graph on every slide was going up except for one: the gold price.

The price of gold's current slide is a huge signal to investors everywhere. Why? Because gold is not just a metal, a currency or a raw material for jewellery; it's the ultimate "fear index". It's the purest window we have to sentiment among investors the world over.

So what's different this time? In previous periods of stockmarket panic, such as the mid-1970s, post-1987 or post-2000, gold was a safe haven for investors, but it was really available only to the rich or those willing to go to the substantial expense of buying bullion and then paying to keep it somewhere safe.

In the wake of the global financial crisis gold prices went ballistic and the buying came from a wider group of investors than in any previous cycle.

From a standing start of about $US800 an ounce in 2009 it soared to more than $US1800 at what now looks like the peak late last year.

That tripling in price was fuelled by stockmarket products called exchange traded funds, which were invented just in time to capture the "flight to safety" that came as global equity markets crumbled.

ETFs meant that anyone could put any amount in gold, or at least in a security that represented gold.

The sell-off we are now seeing in gold is like none before and it is fuelled by ETF selling, particularly in the US. The mums and dads who rushed into gold for the first time are now getting out. You can sell your gold-backed ETFs much faster than you can trade bullion, so the momentum is unprecedented.

It's hard to believe now that less than a year ago gold was supposed to climb to $US2000 this calendar year. It had closed 2012 on the back of 11 years of rising prices but this year it has fallen hard to about $US1220, where it hovers today.

Once it drops through the $US1200 level many traders believe it will drop back to $US1000 in the blink of an eye.

Why does gold matter?

First, its price fall is a tangible elimination of the fear-driven markets we have seen constantly for five years. When the world's investment community fully sells off gold, it means it believes the global economic recovery is real and there is no pressing need to have gold as a hedge.

Earlier this year investors were still talking of a sharp China slowdown, more noisy trouble at European banks and a collapse in the iron ore price, last seen at about $US136 a tonne.

It's a signal the US dollar is at last ready to rise again. Gold and the US dollar can often move in opposite directions ... and gold is clearly falling. What's more, the so-called quantitative easingprogram in the US is clearly coming to an end. Early next year the US Federal Reserve is almost certain to begin "tapering" (or cutting back) the bond buying that represents the QE program, and that means US interest rates will start to climb and, as they do, the US dollar will climb too.

And a rising US dollar will push our Australian dollar lower. In turn this becomes very good news for local manufacturers, exporters and tourism operators.

It's a message that inflation is not an immediate risk. Despite money printing in the US, Japan and elsewhere, inflation is at insignificant levels. As the QE program comes to an end, the specific inflation risk in the US lessens, which in turn lessens the appeal of gold. Remember, gold is meant to be a safe haven, not just in times of crisis but in times of high inflation (crises and inflation often come together, as in Britain in the 1970s, Germany in the 30s).

So when you put those three factors together you get a shot in the arm for just about everyone.

The only corner of the economy that may wince as this legion of once worried investors sell their gold into the open market is goldminers. It goes without saying that since some of our biggest miners failed to make money when the conditions were ideal, now that the price of gold is plunging the future for all except perhaps a handful that may benefit from consolidation activity looks pretty grim.

Newcrest, of course, is the outstanding example here; a company that came undone as the gold price tripled is going to find it very hard to offer anything like benchmark returns when faced with a commodity that's dropping like a stone.

Perhaps the giant players in the gold industry will now make a move on Australian targets in the way the giant players of the agricultural industry recently made a move on local players (Archer Daniels Midland's unsuccessful tilt at Graincorp).

Certainly Barrick Gold and others will be doing the numbers, but it's going to be slim pickings for hundreds of junior goldmining stocks.

That's not to say the gold price can't eventually turn; nobody knows much about gold except in hindsight. Economists still argue as the gold price falls that physical supply is tight, that the real demand for actual gold is well matched. They argue too that gold's traditional "store of value" will always reassert itself. They opine central banks can move the market at will by playing with the vast reserves of bullion held in the world's wealthiest countries.

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And who are we to doubt all that, except to say as we head towards 2014: enjoy the gold price plunge while it lasts because all market cycles are accelerating.

Just now traders are not worried about a global crisis and it's still too soon to worry about inflation. Maybe its time to buy some gold jewellery. It may not be this cheap forever.

James Kirby is managing editor of Eureka Report.