Gold price falls risk provoking a major sell-off as investor fears of a systematic failure in the banking system ease and inflation concerns are alleviated by a fall in commodity prices.
The metal reached a peak of $1,030 an ounce in March as investors rushed to find a haven to buffer themselves against plunging stockmarkets and spiralling inflation in the wake of a global credit crisis.
Money poured into exchange traded funds (ETFs), which track the spot price of gold, as mining stocks failed to keep pace with the surging prices. The Philadelphia gold index, which includes some of the world’s largest mining companies, lagged the spot price by 11% over 12 months.
Last week, however, the global price had fallen as low as $754 having dropped more than $200 in a month. The sudden sharp downwards trajectory has started to provoke fears that a major sell-off of ETF investors could force the price down even further.”[ETF redemptions] is a big risk as that was probably what drove platinum prices down,” says Daniel Sacks, head of resources at Investec Asset Management, based in South Africa.
“You can see why people are selling but if you take the view that gold is a safe haven you would expect some investment to stick.”
The speed of the fall has been of concern but at current prices there is likely to be cuts in production as mining companies have their profits squeezed. This would be an encouraging development, says Sacks, providing the price does not go below $750 which would seriously hit South African mining stocks.
Nicholas Brooks, head of research and investment strategy for ETF Securities, says despite a recent redemption of $240m (£134m) from the company’s gold ETF putting an end to 10 consecutive weeks of inflows it does not look like a major turning point yet.
“One would expect to see large net redemptions in this kind of environment but this hasn’t been the case,” says Brooks. “I think most of the selling has been taking place in futures markets.”
He says whereas platinum was bought on the basis of short-term tactical views gold is seen as a longer-term play by investors although he concedes that “in the end futures traders are more influential to prices [than ETF investors]”.