Gold: Exit, pursued by a bear?

By Robin Amlôt

The fall in the gold price over the two trading days, Friday and Monday in the global markets has set a confusing variety of unenviable records, depending on whose reports you read: it was the biggest two-session fall since 1980, said Bloomberg; the sharpest two-day tumble since 1983, said The Financial Times, taking the price to a two-year low; a record decline since futures trading of gold started in the US in 1974, according to International Business Times.

What lies behind the slump in the gold price? The proximate cause appears to have been reports beginning on 11 April that the Cypriot Government would be selling part of Cyprus’ gold holdings. From bullion reserves of around 13.9 tonnes, reports suggested around 10.36 tonnes worth EUR 400 million would be disposed, marking the largest bullion sale by a Central Bank in the Euro zone since H1 2009.

While the absolute quantity involved is not large, the suggestion that Cyprus may be turning to the gold market to raise even such a relatively small amount (compared to total bail out costs) had some investors and analysts looking thoughtfully and nervously at the reserves being held by other troubled southern European economies. The reasoning being – if Cyprus can sell gold to raise funds so could Italy (holding the world’s fourth largest gold reserves of more than 2,450 tonnes), Portugal (382.5 tonnes) and Spain (281.6 tonnes) or even Greece (111.9 tonnes).

Gold as an investment does not create a return (unless you get into the complicated realms of gold lending and gold loans) and is, therefore, held by investors either as a disaster hedge or inflation hedge. Having said that, plenty of people piled in for the ride on the gold bull market which took the price to a high around $1920 an ounce in 2011.

Despite central bank printing presses in certain countries working overtime metaphorically with massive injections of liquidity through quantitative easing, inflation has so far failed to materialise. Add a growing belief that equities will be the outperforming asset class of 2013 and the tumble in the gold price begins to look like it was an accident waiting to happen, underlined by hints from the Fed, the US Central Bank that it may begin to wind down its QE programme by the end of the year. The next step after that might be firmer interest rates and, of course, rising interest rates would also make gold look less attractive.

And the headline? It is Shakespeare's most famous stage direction, appearing in The Winter's Tale.

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