Gold price volatility pits bullion bulls against paper bulls

The worst one-day spot price fall for 30 years in the gold market in April has raised the stakes in the ongoing battle between those who prefer physical gold, versus those who believe in investing in asset backed paper.

On 16 April, gold plunged 9% over two days, to a low of $1,321. But such volatility is not new. Historical data shows gold made similar lurches up and down between 1915 and 1920, in 1941 and 1947, 1951 and 1966, 1974-1976, 1981, 1983-85, 1987-2000 and 2008. From February 1975 to August 1976, the gold price sank 44%, followed by – for those who held their nerve – a 700% rise in 1980.

The latest reversal gave ‘paper bulls’ another opportunity to deride ‘gold bulls’ as relics from a prehistoric era, and crush any talk, even as lax monetary policy devalued fiat currencies, of a return to a gold standard.

Gold, critics said, couldn’t hold its own against a resurgent US dollar, or even the promise of an upturn in equity markets.

With the end of the world apparently not imminent, who would want to own a lump of metal? And a so-called inflation hedge is not much use if there is no prospect of inflation, especially if central banks are considering slowing quantitative easing.

A confidence bet

Commentator David Weidner at MarketWatch railed: “The reality is that gold is just another Wall Street pump-and-dump investment…What gold really is, is a confidence bet. It’s a barometer of fear. It’s the original volatility index.

“What makes gold different is its history. While past performance should usually be discounted to a large degree for most investments, gold is all about history. Gold is about runs. Runs to buy it. Runs to sell it. Ever since they started using the stuff as currency, gold has been subject to confidence swings.”

After the latest upheaval, outspoken Nobel prize winner and anti-austerity economist Paul Krugman suggested gold had simply reached a tipping point where investors abandoned the view that hyperinflation and an increase in the money supply would drive up the price.

The gold bulls suggested the fall was a buying opportunity but they were drowned out, as the price sank, by a chorus of platitudes such as “Never try to catch a falling knife”.

Some hedge fund managers bragged about how they had made new fortunes shorting gold over the past year. Troy Gayeski, a partner and senior portfolio manager at SkyBridge Capital, a global alternative investment firm with $7.4bn in assets under management and advisory, warned the gold price could eventually halve from its highs in August 2011.

Gayeski put the sell-off down to exasperation. “Many folks held on to gold for a long time and have been taking losses for a while, wondering why they own gold when it yields nothing, while equities and bonds are going up,” he said.

“They are probably just saying: We’ll sell out of our position and do something else with the money. Gold is the ultimate mark to market asset class, meaning it is only worth what somebody else will pay for it. And nobody has any idea at all what the price should be.”

The precipitous fall inevitably provoked fresh demand. BullionVault, the physical gold and silver exchange online, observed that the crash stirred huge new interest in physical bullion. The volume of internet searches for ‘gold price’ leapt to new record levels, according to Google Trends, while downloads of its official gold-trading and price-chart apps for the iPhone rose three times over to record levels.


Adrian Ash, head of research at BullionVault, said the selling gathered momentum because of profit-taking by long-term investors, but very quickly bargain hunters moved in for both gold and silver. “Net demand on BullionVault’s peer-to-peer exchange online is now strongly positive for both precious metals,” he added.

Retail investors, especially, dumped gold-related paper instruments, evidenced by outflows from the SPDR gold trust, and opted instead for physical holdings, leading to a significant backlog on orders. The US Mint suspend sales of 1/10oz gold coins and added a premium for buyers.


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