Sharps Pixley’s Austin Kiddle explains gold’s puzzling drop on election outcomes

After the game-changing election results in Greece and France on Sunday, one may be puzzled by the price action of gold relative to other markets this week.

By Tuesday, gold futures have fallen almost $41, by 2.5%, to $1,604.5; much more than the S&P, down 0.4%; or the Stoxx, down 0.5%, or crude oil, off 1.5%; and even the VIX, which was up 0.6%.

Gold futures dipped to $1,595.5 during trading on Tuesday and were trending lower on Wednesday in Asia.

As our Cchief executive Ross Norman mentioned yesterday, gold is over-reacting to bad news and ignoring good news.

Gold immediately reacted badly to news that Alexis Tsipras, head of Greek’s second largest Syriza Party, is forming a left coalition government and could renegotiate all bailout and austerity promises possibly stopping all multilateral aids.

The euro/dollar dropped to a three-month low at 1.30.

A new Greece election in June is also likely which leaves a distinct possibility of Greece defaulting and exiting the Euro which will have contagion on Spain, Portugal, Italy, and so on.

In addition, the uncertainty would further aggravate Eurozone economic contraction which is deflationary, something gold traders do not like to see.

Calmer heads may want to focus on the good news that physical demand from Asia are improving in the case of India and exploding in the case of China. India has just rolled back the 1% excise duty on jewellery, which would improve imports going forward, expected to reach about 700 to 750 tons in 2012.

Chinese imports of gold via Hong Kong went up 600% in the first quarter to about 135 metric tons.

The Chinese have bought more each month as prices went lower. Chinese gold import is about 45 tons more per month, or 540 tons annualized, in the last eight months compared to a year ago, pointed out by Eric Sprott, CEO of Sprott Asset Management; annual gold supply is 2,200 tons excluding China and Russia whose gold are internally consumed.

Recent central bank (non-G6) data shows that they are buying gold at an annualized rate of about 700 tons.

The weakness in the paper gold market may continue due to technical selling or investor fatigue, as our CEO remarked.

But this weakness is masking the massive activities going on in the physical gold market, especially among central banks that may be happy at a lower purchase price.


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