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Three charts showing just how violent the gold price
has become...
Only
12 months ago, the gold
price was so placid - quietly making new record highs above $1300 and
then $1400 per ounce - that volatility in its daily swings hit the lowest
level in half-a-decade.
Hardly
the stuff of mania. And it only made buying gold a simpler
decision for new and existing investors, especially those borrowing money to
do it on the derivatives market. Whereas this summer's surge to (and sharp drop
from) $1920 an ounce has already thrown a fat chunk of "hot money"
out of the trade.
As
you can see, leveraged speculators are fleeing the gold futures and options
market at the fastest pace since Lehman Brothers blew up in Sept. 2008.
Already shrinking by 40% since the new record peak of start-August, their
"net long" betting on gold prices (simply
the number of bullish minus bearish contracts) has crashed to barely 600 tonnes equivalent - the smallest level since mid-2009,
and a level first reached at the tail-end of 2005.
Now,
whichever came first - chicken or egg, price drop or hot-money flight - the
end result so far this autumn is a jump in price volatility last seen at (you
guessed it) Lehman Brothers' collapse.
"Key
characteristics of a safe-haven asset are low price volatility and minimal
risk of capital loss," notes the latest Commodities Weekly from
French investment bank and bullion dealer Natixis.
"With
gold price volatility doubling, and gold prices dropping
by more than 10% in just three days [last week], these characteristics no
longer apply to gold."
But
this loss of what was apparently gold's
"safe haven" status hasn't diminished demand. Quite the
contrary in fact for physical gold buyers, both in Europe and the US but more critically in the
world's No.2 consumer - and fastest-growing source of demand - China.
Reports
from bullion bank and secure logistics contacts all point to a surge in gold buying from Asia,
with large 400-ounce bars being sucked out of London for turning into
kilo-bars in Switzerland to be shipped onto China. Price volatility still applies,
however. With bells on.
If
you've struggled over the last month with gold's new volatility, then pity buyers
and sellers on the Shanghai
Gold Exchange. Violence in the domestic Chinese gold price has been worse
by one fifth than in US Dollar prices on the London Fix - still the
global benchmark price almost 100 years after the end of Great Britain's
imperial gold standard.
That's
because London is still central clearing for the vast bulk of the world's
gold, where it sits ready for shipping wherever else it will find a use.
Increasingly, that somewhere else is China, even though it's now the world's
No.1 mining producer each year. Chinese refineries lead new applications to
produce London
Good Delivery bars, the 400-ounce wholesale standard worldwide. Yet no
Chinese-made bars should (as yet) have reached London's Good Delivery bullion
vaults, despite their producers devoting themselves to gaining LGD
accreditation. Because China's borders are closed to exports of gold.
This
one-way traffic - into China - helped last year to plug the 360-tonne
gap between China's world-beating mine output and it's galloping demand
for gold. The huge volatility in Shanghai premiums over London gold is of
course a function of the metal's underlying volatility. But it's clearly
being extended by the logistical bottlenecks and delays that are guaranteed
to hit this very physical trade, now trying to ship ever-more gold bullion from the
other side of the world.
Adrian Ash
Head of
Research
Bullionvault.com
You can Receive your first gram of Gold free by opening an
account with Bullion Vault : Click here.
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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