Gold plunges to five-year low

published 24 July 2015

Goldbugs have had a nasty week goldhas slumped to a five-year low around $1,100 an ounce.The price slid by 4.2% on Monday alone its worst day in two years as heavy selling on US and Chinese commodity futures exchanges saw more than $1.7bn-worth dumped on the market in a few minutes. Gold has fallen 42% from its record peak over $1,920, set in September 2011.

The sharp plunge is being put down to a bear raid, or a deliberate attack by short sellers eager to test new lows. They were "pushing on an open door", saysAlistair Osborne in The Times. They struck during Asian trading hours when Europeans and Americans were asleep. So the relatively small market was even less liquid than usual, making it vulnerable to sudden slides.

Electronic trading systems then compounded the initial sell-off because gold had fallen through a certain threshold (around $1,100) at which automatic stop-losses kick in for many traders. That triggered a cascade of selling. "This sudden drop during Asian trading seemed to have been triggeredby some stop-loss sell-offs that have nothing to do with fundamentals,"says Wallace Ng of Gemsha Metals.

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China disappoints the goldbugs

Given that China has amassed vast foreign-exchange reserves, investors thought it might have spent a lot more on gold. It wants the yuan to be taken seriously as a global reserve currency and the major economies all have substantial gold holdings notably the US, with a world-beating 8,133 tonnes. However, it may have had trouble deploying its billions of reserves into gold without driving up the price significantly, as the market is so small. But the upshot is thatChina has left the door open to further buys, "which should limit the downside for gold", says Joni Teves of UBS.

Good news is bad news for gold

The main problem for gold, however, is that "a turn in the monetary cycle may at last be on the cards", says the FT. The US (and the UK) central banks are gradually preparing for higher interest rates. As gold pays no interest, it looks less appealing when the yield on other assets climbs.

More broadly, gradual normalisation of monetary policy reflects an improving economy, and gold prefers instability and weakness. And the impending rise in US rates is being accompanied by a stronger dollar, which also hampers gold because it is priced in dollars. A stronger greenback also makes it pricier for holders of other currencies. While we continue to suggest holding 5%-10% of your portfolio in gold as insurance, for now it looks set to go nowhere.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.