As gold price plummets, is it time to buy?

May 26, 2013 10:38 am

To seek answer to these questions, spoke with Gerhard Schubert, Head of Commodities, Wealth Management, Emirates NBD.

1) Can you put into context just how steeply the price of gold has fallen?

After hitting an all-time high of US$1,926 an ounce about a year and a half ago, gold prices have fallen about 33% and are now hovering around US$1,360. So this has been a significant drop.

2) Why have gold prices been falling?

At the moment there are two trends in the gold market: on the one hand there has been a sharp rise in physical gold buying by consumers, while on the other there has been an even greater increase in selling by investors through liquidation in exchange-traded fund holdings.

Physical buying by consumers, especially in China and India, has been phenomenal over the past month, and refineries have been working flat out 24/7 all over the world to keep pace. However, ever since the price of gold fell below the support level of US$1,525, the physical buying has been overwhelmed by the rapid selling by investors. Investors sold about 180 tonnes of gold through ETFs in the first quarter, or about US$9.3bn worth of the precious metal.

What we are seeing is that investors have a lot of liquidity due to very accommodating central bank policies, and with stock markets across the globe achieving new highs on a daily basis, investors are embracing equities as an asset class and moving away from commodities. There is very little to suggest that this trend will end any time soon.
Gold prices are also coming under pressures as a result of foreign exchange movements. The US dollar and the Euro have gained against the Japanese Yen and that is also decreasing the appetite for investors to hold positions in gold. So the current environment is very challenging for the gold market.

3) Do you think investors should be wary of the sharp rise in global equities markets?

The speed at which the stock markets have rallied in many parts of the globe has been a surprise, especially given the underlying GDP of some these countries. Stocks typically represent the economic power of a country, but the GDP figures in these countries do not justify the reality in the equities markets. Are the economies of the US, Japan, Germany etc. really doing that well?

4) So where do you see gold prices heading and how would you advise potential buyers?

We have to face the fact that the gold market had 12 years in the limelight, but now is in the midst of a bear cycle. Nevertheless, I still believe we will soon enter a consolidation phase where prices will hover somewhere around $1,500-$1,600. When you look at the all-in cost structure of gold mining, it is around $1,300 an ounce, so I think we are nearing the logical bottom of the barrel when we talk about gold prices. We could even start seeing some slowing of production. So I expect that we are now approaching a level where you hopefully will make money on a long position in gold, over a medium time frame.