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06-10-2011, 04:56 AM
Business Times - 06 Oct 2011
Gold rush 2011: Once again, all that glitters is not gold
By ROB CURRAN
THE recent collapse of gold prices suggests that the 2011 gold rush was a speculative bubble. And it may already have popped.
Gold's latest bull market began in late 2008 because investors longed for something tangible. Faith in the value of stocks, bonds and even currencies was shaken by the financial crisis as people wondered whether any corporation or government was strong enough to stand behind a certificate.
As a physical possession, gold was one of the few investments that needed no such guarantee. During the scares of the next two years - when unemployment numbers shocked or the euro came close to cracking - savvy investors took cover in gold. Consequently, the precious metal more than doubled in price, from just over US$700 an ounce in November 2008 to almost US$1,900 an ounce on Aug 22 this year.
At some point this year or last, defensive hedging gave way to feverish speculation. This was clear from the explosive growth of trade in gold futures and exchange-traded funds, and from the precious metal's ubiquity in financial conversations in the media and at dinner parties. The same people who had once fulminated about US$200 oil and Dow 20,000 breathlessly promised US$4,000 gold. What had been a niche investment for 30 years suddenly became top of the shopping lists that investors gave their financial advisers.
'It was almost a panic to buy gold,' said Eric Marshall, a portfolio manager with Hodges Capital in Dallas. 'Just like when people were rushing in hand over fist to buy Internet stocks because they couldn't stand the thought of their neighbour making million of dollars on dotcoms and they get left behind. It was the same thing with gold. You'd turn on Bloomberg radio, and every other commercial was a gold commercial. Back in the late 90s it was all Internet IPOs. Now it's gold, gold, gold.'
Speculative bubbles are difficult to spot until they become blatantly obvious. Pull up a three-year chart of oil up to late 2008 or of home prices up to late 2006 or of the Nasdaq Composite up to mid-2000, and the classic profile is evident.
On the left, a jagged mountainside getting increasingly steep until it reaches a peak; on the right, a sheer cliff face, plunging to the abyss. The cliff is just beginning to appear on the three-year chart of gold up to today.
Since its August peak, it has fallen more than 15 per cent to around US$1,600 an ounce. In early European trading yesterday, spot gold was down 0.9 per cent at US$1,605.29 an ounce, after shedding 2 per cent of its value late on Tuesday to dip temporarily below US$1,600 an ounce.
This may not yet be the peak - it could be another ridge on the jagged climb upwards. But the extreme nature of the sell-off is a warning. Any time there is a rush into an investment, there is inevitably a corresponding rush out of it. That is especially true of gold.
'Gold prices soared in the early 1980s, and many speculative investors poured into the market only to lose their shirts after the price of gold collapsed,' said Morningstar analyst Abraham Brailin, in a research note assessing the risks in gold-tracking exchange-traded fund SPDR Gold Shares, commonly known by its ticker symbol GLD.
The history of the GLD itself illustrates the herd mentality behind gold's rise. Launched in 2004, the fund held US$7.3 billion in assets under management by late 2006. Now it holds nearly nine times that: US$66.2 billion.
The average daily volume of gold futures contracts traded on the Comex branch of the New York Mercantile Exchange has also risen fast. Roughly 280,000 contracts traded every day in August 2011, almost triple what it was only a year earlier, when fewer than 100,000 contracts changed hands on a daily basis. In 2007, the average daily volume was closer to 50,000 contracts.
'Gold bugs' are perennial champions of the precious metal's long-term value. They argue that gold's recent drop was merely a pause on its inexorable march upwards.
Said Trenton Kimminau, an experienced gold trader at brokerage Global Futures Exchange & Trading: 'My view is that gold did get overbought but I wouldn't necessarily call it a speculative bubble. A lot of the gold buying had to do with safe haven buying as a result of economic problems.'
The valuation of oil, technology stocks, and even houses was once justified in a similarly convincing manner. When speculation takes over, the market pays little heed to 'fundamentals' on the way up, or on the way down.
Gold rush 2011: Once again, all that glitters is not gold
By ROB CURRAN
THE recent collapse of gold prices suggests that the 2011 gold rush was a speculative bubble. And it may already have popped.
Gold's latest bull market began in late 2008 because investors longed for something tangible. Faith in the value of stocks, bonds and even currencies was shaken by the financial crisis as people wondered whether any corporation or government was strong enough to stand behind a certificate.
As a physical possession, gold was one of the few investments that needed no such guarantee. During the scares of the next two years - when unemployment numbers shocked or the euro came close to cracking - savvy investors took cover in gold. Consequently, the precious metal more than doubled in price, from just over US$700 an ounce in November 2008 to almost US$1,900 an ounce on Aug 22 this year.
At some point this year or last, defensive hedging gave way to feverish speculation. This was clear from the explosive growth of trade in gold futures and exchange-traded funds, and from the precious metal's ubiquity in financial conversations in the media and at dinner parties. The same people who had once fulminated about US$200 oil and Dow 20,000 breathlessly promised US$4,000 gold. What had been a niche investment for 30 years suddenly became top of the shopping lists that investors gave their financial advisers.
'It was almost a panic to buy gold,' said Eric Marshall, a portfolio manager with Hodges Capital in Dallas. 'Just like when people were rushing in hand over fist to buy Internet stocks because they couldn't stand the thought of their neighbour making million of dollars on dotcoms and they get left behind. It was the same thing with gold. You'd turn on Bloomberg radio, and every other commercial was a gold commercial. Back in the late 90s it was all Internet IPOs. Now it's gold, gold, gold.'
Speculative bubbles are difficult to spot until they become blatantly obvious. Pull up a three-year chart of oil up to late 2008 or of home prices up to late 2006 or of the Nasdaq Composite up to mid-2000, and the classic profile is evident.
On the left, a jagged mountainside getting increasingly steep until it reaches a peak; on the right, a sheer cliff face, plunging to the abyss. The cliff is just beginning to appear on the three-year chart of gold up to today.
Since its August peak, it has fallen more than 15 per cent to around US$1,600 an ounce. In early European trading yesterday, spot gold was down 0.9 per cent at US$1,605.29 an ounce, after shedding 2 per cent of its value late on Tuesday to dip temporarily below US$1,600 an ounce.
This may not yet be the peak - it could be another ridge on the jagged climb upwards. But the extreme nature of the sell-off is a warning. Any time there is a rush into an investment, there is inevitably a corresponding rush out of it. That is especially true of gold.
'Gold prices soared in the early 1980s, and many speculative investors poured into the market only to lose their shirts after the price of gold collapsed,' said Morningstar analyst Abraham Brailin, in a research note assessing the risks in gold-tracking exchange-traded fund SPDR Gold Shares, commonly known by its ticker symbol GLD.
The history of the GLD itself illustrates the herd mentality behind gold's rise. Launched in 2004, the fund held US$7.3 billion in assets under management by late 2006. Now it holds nearly nine times that: US$66.2 billion.
The average daily volume of gold futures contracts traded on the Comex branch of the New York Mercantile Exchange has also risen fast. Roughly 280,000 contracts traded every day in August 2011, almost triple what it was only a year earlier, when fewer than 100,000 contracts changed hands on a daily basis. In 2007, the average daily volume was closer to 50,000 contracts.
'Gold bugs' are perennial champions of the precious metal's long-term value. They argue that gold's recent drop was merely a pause on its inexorable march upwards.
Said Trenton Kimminau, an experienced gold trader at brokerage Global Futures Exchange & Trading: 'My view is that gold did get overbought but I wouldn't necessarily call it a speculative bubble. A lot of the gold buying had to do with safe haven buying as a result of economic problems.'
The valuation of oil, technology stocks, and even houses was once justified in a similarly convincing manner. When speculation takes over, the market pays little heed to 'fundamentals' on the way up, or on the way down.
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