Has bullion lost its lustre?

April 15, 2013 will go down in the history books of global financial markets as yet another Black Monday.

Victor Makanda

The last was on August 8, 2011 and was as a result of the downgrade in the US economy’s credit rating from AAA+ status to AA+ by Fitch rating agency.  The downgrade saw the key US equity indices, the Dow Jones and Standard & Poor losing 5,55% and 6,66% respectively.

Some 19 months down the line on Monday April 15, 2013, gold prices tumbled 9,2% to US$1,395 an ounce as investors shunned the metal in favour of other riskier assets with higher returns. Gold’s drop, the sharpest one-day decline since February of 1983, followed a 4% slump that had been registered in the prior session on April 12.

Following bullion’s tumble, a broader sell-off in commodities and stock markets was witnessed.

The Standard & Poor’s 500 equity index declined 2,3%, its sharpest one-day decline since early November 2012. Copper, on the other hand, fell to a 17-month low at U$7,085 a tonne; aluminium sank to a 42-month low; silver fell 11% to US$23.36 an ounce, its lowest price since October 2010.

Gold’s recent slump, attributed to panic selling and a gold bear market, surprised most investors and policymakers, considering that it has been on a sustained bull run for the past 12 straight years.

What most investors forgot was a quote from Sir Isaac Newton in relation to gravity which states that; “What goes up must come down.” The metal has plummeted by 29% from its September 2011 record of US$1,923.70 an ounce. The correction of the precious metal was overdue and inevitable, only that investors were not certain  when it was going to happen.

China’s disappointing economic data did the magic as its economic growth unexpectedly slowed to an annual pace of 7,7% in the first quarter of this year, compared to 7,9% in the last quarter of 2012. The economic data suggested that the world’s second largest economy’s demand for metals might soften.

Financial instability in Cyprus also had an adverse bearing on gold’s price as the Central Bank of Cyprus highlighted that it would sell gold reserves to finance its European Union bank bailout. The news increased selling pressure as other central banks, mainly in the Euro-area, mulled official disposals of their gold holdings.

Furthermore, the recovery in the US economy in terms of the on the jobs market, manufacturing output and data on March’s cost of living falling by 0.2% reduced the metal’s appeal as a hedge against inflation. Investors felt the economy had finally turned the corner, thereby increasing the likelihood that the quantitative easing measures might come to an end.

The recent move from bonds to stocks, dubbed the “Great Rotation” has seen the S&P 500 more than doubling from its 12-year low in 2009. Record-low interest rates, together with improving company earnings, have again reduced appetite for the yellow metal. Such a trend has seen global exchange-trade products holdings down 9.7% to US$103,24 billion in 2013.

Gold funds have suffered net outflows of US$11,2 billion this year while global equity funds have registered net inflows of US$21,25billion.

Despite the decline in the gold price, the value of gold as a hedge still remains attractive as the inflationary effects of the loose monetary policies may soon be apparent, ultimately eroding the value of paper money.

The recent downgrading of the United Kingdom’s credit rating on April 19,2013 from AAA+ to AA+ will continue to support gold’s price as significant inherent risks are still embedded in the recovery of most developed economies.

The Euro area has been consistently flagged as a key risk for 2013 by most multilateral institutions and this may possibly support gold’s lustre as a safe-haven asset.

The Boston Marathon bombings, coupled with the nuclear weapons threats from North Korea, are just reminders of the fact that the global economy will never be a safe place. Such risk and fears might possibly support gold’s price while most central banks’ diversification strategy from currencies to gold reserves is expected to increase, taking advantage of the recent low prices.

How and where gold prices will end the year will depend on a lot of factors, though support for the metal is still there.

Overall, gold’s recent correction is mainly explained by the fact that the metal had simply been overbought. Gold, however, always has a surprise element.

Turning to Zimbabwe as a commodities-based economy, the weakening of the prices exposes us to global commodity price risk. Such risk, not only for gold, explains the reason why exports in the Ministry of Finance’s State of the Economy report for the first quarter were down 10.3% at US$689million.

The worrying thing remains hat of Zimbabwe’s lack of pro-activeness in taking advantage of firming commodity prices in recent years. Gold and other minerals’ output are now increasing at a time when prices are weakening. Most miners in the region took advantage of the global commodities boom which had a positive impact on their economies. Absence of long term financing and unfavourable investor policies, especially in the mining sector, will see us lagging behind.

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