Speculating on the price of gold

April 22, 2013

Speculating on the price of gold

Brent Hindman has some thoughts on why the price of gold was so volatile last week

There has been a lot of unnecessary wringing of hands over the recent gold price ‘plunge’. But I reckon there will be a lot of speculators very happy with what happened last week when gold took a thumping.

I’ll explain further on. But first, what the cynics seem to be conveniently forgetting is that, even at a low of around US$1,370, gold was trading at its early 2011 level. Over five years, it’s up nearly 50 per cent.

Add to that the fact the Kiwi is at an almost all-time high and it would seem New Zealand precious metal investors can afford to be optimistic. Right now the price of gold is steady and in fact, at NZ Mint we are seeing a lot of buying interest at this level.

So what’s been going on?

The fact is, the recent price weakness doesn’t appear to have been driven by any dramatic change in economic or world stability issues. My guess is much of it has resulted from market activity by large precious metal futures traders.

There are other factors at play too. Cyprus and Europe are still a worry, US economic data remains relatively weak, China’s growth is smaller than most thought, Japan has announced a programme of quantitative easing.

Then there’s been the terrorist attack in Boston and at home there has been discussion about the shape of any Reserve Bank bailout that might happen. With all this going on you’d think there would be a flight to gold, not from.

However, if you are long term bullish on gold – long term you expect it to appreciate – you can still profit from taking a short position. That is, you sell gold you don’t have on the expectation others will do the same to drive down the price so you can buy it back cheaper before you have to settle.

I believe this is what has happened. There is some evidence.

There was some publicity a couple of weeks ago implying Cyprus was considering offloading some gold reserves so as to stabilise its economic situation. Soon after there were some large sell-offs of gold in New York which drove down the gold price.

You could almost see the light bulbs go on above the heads of the speculators. Falling gold price equals short opportunity. Once the price dropped to US$1,550 the sell-off accelerated and before we knew it we were down 15 per cent in four days at US$1,330 an ounce.

So now the shorts are in paper profit and can simply bide their time before coming back in to cover their contracts. Already today (Monday 22 April) gold has recovered back to US$1,404.

What does that mean for the average bullion investor? Well, a lot depends on personal circumstances of course – when you bought and what you paid; your long term outlook on gold; whether or not you need the funds elsewhere.

But generally speaking, New Zealand investors have a pretty healthy attitude to gold.

Early last week we saw a mix of selling and buying. Later in the week roles reversed and customers were predominantly buying. It seems there is recognition that with the New Zealand dollar remaining strong and the price of gold and silver lower, investors are keen on precious metals. So they’re taking the opportunity to increase their investment now.

In terms of our business, we are benefiting from the higher level of demand even though the price is slightly lower. So our task is to be vigilant with the way we manage our stock, and to increase our support functions in order to cater for the increased customer interest.

One more thing. There’s a bit of talk around that gold has no intrinsic value. My thinking on that is there are equally strong views on both sides of the fence.

The most important thing for investors to do is to get good advice from people whose opinions they value. Then, if they are choosing to put their money into gold, they should purchase through a mainstream bullion dealer who can supply their gold or silver in a format that is easily traded in the future.

The most popular forms of gold are currently coins – the one ounce Gold Kiwi, Gold Taku are examples – and the PAMP one kilo bar. Which you prefer depends on individual circumstances but you can’t really cut a kilo of gold in half if you want to sell only half your investment.

Right now as we ponder what was a pretty interesting week in the gold market, everything seems to have stabilised and we are seeing a strong buy trend. And that means the shorts just may be ready to climb in and help boost the price.

Brent Hindman is the head of sales and marketing at NZ Mint. Hindman has a B.Sc. from the University of Waikato

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