Gold bugs have never seen anything like it. The plunge in the precious metal’s price has been precipitous. As the chart above shows, the price of spot gold is back to where it was in mid-2010. This quarter’s price loss will likely set a new record: with only a handful of trading days left, it is already down 22.8% to barely $1,200 an ounce. Investors fear that the price could continue its descent from its record peak above $1,800 an ounce reached in August 2011 to below $1,000 an ounce.
This blog noted in April, when gold was at merely at a 2-year low, that the fall had been so far and fast that fundamentals alone — central banks starting to unwind quantitative easing; indebted euro zone countries selling reserves — might not explain it. There have been hints of large and leveraged hedge fund investors getting squeezed by the rapid fall, but many investors just got out while they could.
The world’s largest gold-backed exchange-traded fund (ETF), SPDR Gold Trust, reported the biggest one-day drop in its holdings in more than two months at 16.23 metric tons on Tuesday. That took the fund’s total outflow for the year to 381 metric tons. In all, there has been 550 metric tons of gold sold out of ETFs since mid-February. “That’s the equivalent of saying we’ve added to the gold market an additional 11% on top of 2012’s gold (mine) output,” Natixis analyst Bernard Dahdah told Reuters.
So far lower gold prices have not tempted retail investors and consumers to become buyers — as happened to some extent in April. In India, the world’s largest gold consumer, the government curbed gold imports to cut its current account deficit. This week, the country’s central bank, Reserve Bank of India, told regional banks not to make loans against gold jewelry and coins. In China, a government-induced credit crunch and a slowing economy have dampened demand there and in equally gold-fixated Hong Kong.
Central banks may be stepping in now to boost their reserve holdings of gold, as some, notably Russia’s and Turkey’s, did in April. That won’t be known until the International Monetary Fund releases its monthly update for June in a couple of months’ time — by when, unless investors change their mind (again) about the inflationary impact of quantitative easing, gold bugs could be reeling even more than they are now.