From darling to whipping boy, risk haven to risky business.
Gold took another wobbly step in its steep descent Wednesday, shedding $16.80 (U.S.) to $1,540.30 an ounce in New York, as Greece's political uncertainties once again spooked financial markets. It was the metal's 11th decline in the past 13 trading sessions, during which time it has lost more than $120.
Gold is an investing theme that has thrived through years of seismic shifts in financial markets. But now, one of the long-accepted rationales for turning to the precious substance – as a haven from risk – has been turned on its ear. The metal is getting sold off whenever concerns about Greece, sovereign debt and the euro grab the day's headlines.
"Gold is now behaving like a risky asset," said Capital Economics chief global economist Julian Jessop in a research note.
BLAME BERNANKE – AND QE
Gold's turning point was Federal Reserve Board chairman Ben Bernanke's testimony to U.S. Congress on Feb. 29, which poured cold water on the likelihood that the Fed would pursue a third round of quantitative easing (so-called "QE3"). Quantitative easing essentially boils down to the printing of money – which is considered inflationary and thus has been supportive of gold, a traditional hedge against inflation.
"That undermined the gold trade, at least for now," said Aaron Fennell, futures specialist at ScotiaMcLeod. "We basically need inflation to make gold more valuable."
Greece's deepening despair has also eased inflation risk, he said, because Greece's euro-zone partners look increasingly disinclined to extend more bailout funds to Greece. "Before, the bailouts were basically printing euros," Mr. Fennell said. "That's inflationary."
LIQUIDATION TAKES OVER
There is also evidence that hedge funds have been unwinding speculative positions in gold futures, as mounting risks out of Europe cause fund managers to liquidate holdings and raise cash.
Speculative long positions in U.S. gold futures contracts have slumped nearly 30 per cent since the end of February, and now sit near three-year lows. Total open interest in gold futures – combined long and short positions of both speculators and commercial entities – recently fell to a 32-month low, and is 40 per cent below its late-2010 peak.
"Investors are seeing returns in equity markets evaporate … they're moving back into U.S. dollars and short-dated Treasuries, and they're selling their gold if it still has a profit, to rebuild the losses in their portfolios," said Marcus Grubb, managing director of investment at the World Gold Council.
Mr. Fennell said speculators finance much of their activity with debt, so they have had to sell off highly liquid and profitable assets such as gold to raise funds to cover their losses in other assets that have declined in recent weeks – even if they still like gold as an investment. The rapid fall in gold prices themselves has also triggered margin calls that have forced speculators to abandon their positions.
INDIA'S BUYING SLUMP
The World Gold Council's quarterly report on gold trends, released Thursday, shows global demand in the first quarter fell 5 per cent from a year earlier. While that's not big in historical terms, more troubling is the source of the declines – India, the world's biggest market for gold, which saw demand plunge 29 per cent from a year earlier.
Amid concerns that Indians' penchant for gold-hoarding is bloating the country's current-account deficit and crippling its economy, the Indian government raised duties on gold to slow imports. In protest, the country's jewellers went on strike for three weeks in March and early April, slamming the brakes on gold demand.
But a bigger issue than the duty hikes – which have since been reversed – is the slumping value of India's rupee. The currency is off nearly 20 per cent against the U.S. dollar since August. As a result, gold in rupee terms has been selling at near-record highs, despite price declines in U.S. dollar terms.
Mr. Grubb said that with the jewellers' dispute resolved and world gold prices continuing to fall, India's demand is showing some "anecdotal" signs of rebounding. But gold imports in April were only about one-third of the levels of a year earlier, and some fear a similar drop for May. Some recent forecasts peg India's 2012 gold shipments at about 65 to 70 per cent of 2011 levels.
Infographic: Plunging demand