After ten consecutive years of gains, gold is definitely struggling.
Since last September’s record high above USD 1,900 an ounce, the price of gold has fallen 13% to around USD 1,650. The price action over the past three weeks ought to be particularly troubling for the gold bulls, especially the precipitous USD 90 collapse on the final day of February and the continued steady decline since. However all is not lost for those who retain a bullish disposition towards gold, although if it breaks through the USD 1,522 low set right at the end of last year then it will spell deep difficulty.
Unfortunately for gold, the circumstances that perpetuated such a prolonged and pronounced bull run are now less evident. The fear of systemic global financial collapse and currency debasement that has been around over the last couple of years has diminished. With US banks now much better-capitalised and the US economy apparently looking healthier, some confidence has returned to the world’s main reserve currency. At the same time, there has been an increase in appetite for growth assets, which has weighed on no-yielding assets such as G4 government bonds, cash and also gold. A very high equity risk premium is one of the major reasons for this year’s surge in equities. Unsurprisingly, gold stocks have significantly underperformed. The share price of Newcrest, one of the world’s largest producers of gold, has fallen almost 20% in the past four weeks.
Separately, India recently doubled the tariff on gold to 4% – gold represents a staggering 14% of its imports and India accounts for around 25% of global gold demand. As a result of the tariff increase, gold demand in the country has waned appreciably, and a huge number of proprietors who are involved in the trade have closed and/or gone on strike, at least temporarily. For its part, excessive demand for gold in India is contributing to a large and expanding trade deficit, so it is little wonder that the government is targeting gold. India consumed 993 metric tons of gold last year, compared with 770 tons in China, according to calculations made by the World Gold Council.
If China were to join India in making it much more expensive to buy gold, and if confidence in fiat currencies continued to improve, then gold bulls really would have a problem.
