Editorial: Price drop catches gold investors off guard

As 2016 wore on, gold miners and investors were getting pretty comfortable assuming that spot gold prices would hold firmly above US$1,300 per oz. for the foreseeable future, and that the gold sector was indeed the shining light of the mining world, notwithstanding metallurgical coal’s freakish run of late.

Well that all came crashing down as the fourth quarter got underway, with all the precious metals getting swept down in the riptide.

On the last day of the third quarter, Sept. 30, spot prices for the main precious metals stood at US$1,322.50 per oz. gold, US$19.35 per oz. silver, US$1,035 per oz. platinum and US$722 per oz. palladium.

Exactly a week later, prices were down US$63.75 per oz. gold (-4.8%); US$2.02 per oz. silver (-10.4%); US$59 per oz. platinum (-5.7%); and US$48 per oz. palladium (-6.6%).

At press time, gold traded at US$1,254.80 per oz., meaning spot gold prices are now down US$73.00 per oz., or 5.5%, in the last 30 days, but still up US$90.90 per oz., or 7.8%, in the last 12 months. Silver, meanwhile, is off 8% in the last 30 days but up 10.7% over 12 months.

It’s the worst one week drop in gold prices since 2014, and traders are now looking at short-term support levels around US$1,250 per oz.

If you believe in charts, the one-year price chart for gold reveals an especially ugly head and shoulders formation, which suggests a return to the US$1,100-per-oz. range seen in late 2015.

Indeed, the bears have come out of hibernation, with firms such as Wells Fargo now calling for gold to drop another US$200 per oz. Their head of real asset strategy, John LaForge, wrote in an Oct. 7 report that, “The history of gold, and commodity super-cycles, says that gold may very well lose another US$200 per oz., testing the US$1,050 level, before it is time to buy again.” He added that gold is “currently buried knee-deep inside a commodity bear super-cycle, which began in 2011.”

In one positive sign for gold, investors took advantage of last week’s price drop to push global holdings of bullion-backed exchange traded funds to their highest levels since 2013. Most notable, the SPDR Gold Trust — the world’s largest gold-backed exchange-traded fund — rose to 958.90 tonnes (30.83 million oz.) on Oct. 8.

There are still enormous tensions in the global financial system, but unfortunately for gold investors and miners, the U.S. dollar has been the biggest beneficiary as a safe haven over gold, despite weak U.S. jobs data.

The greenback has benefited from renewed speculation that a U.S. Federal Reserve interest-rate hike could once again be in the offing later this year. Charles Evans, president of the Federal Reserve of Chicago, said on Oct. 11 that the U.S. economy is on sound footing and that a December rate increase “could be fine.”

As for competing currencies, the Chinese renminbi — now part of the International Monetary Fund’s Special Drawing (SDR) basket — fell hard on China’s return from the Golden Week holidays, as it was fixed by Beijing’s central bank at its lowest level versus the U.S. dollar since September 2010.

Meanwhile the U.K. pound has returned to the financial headlines, falling briefly below US$1.21 on Oct. 11 after a “flash crash” to US$1.1491 on Friday, Oct. 7, compared to US$1.2728 only a week earlier.

The pound sterling is now firmly in first place as the worst-performing major currency of 2016, having slumped by 17% year-to-date and 20% against the U.S. dollar since the Brexit vote in June 2016, and raising concerns about inflation and the country’s ability to finance itself. On a trade-weighted basis, the pound is at its lowest value against the euro since its launch in 1999.

This latest weakness comes from new fears that there will be a relatively severe rupture between the United Kingdom and the European Union rather than a hoped-for gradual, friendly transition.