Gold is down 30 per cent from its record high of $1920.30/ounce in September 2011. With the milestone for a bear market at 20 per cent, is gold into a bear phase?
Investors certainly seem to think so. SPDR Gold Trust, the world’s largest gold backed exchange traded fund (ETF), has reduced its gold holdings by 196 tonnes since the beginning of this year, as investors redeemed units.
Indian ETFs are in a similar situation, suffering net outflows of Rs 14 crore in the last three months. This is against a net inflow of Rs 1,131 crore in the previous quarter (October-December of 2012).
Commodity factor
The rapidly waning investor interest in gold is not just a reflection of fear about central bank sales or other factors that drive gold prices.
They are a result of what’s happening in other asset classes as well. For one, there is improving economic growth in the US, which has sparked a global stock market rally. The MSCI World index is up 8 per cent so far this year. The US bellwether, Dow Jones Industrial Average, has rallied 12 per cent. Also, the yellow metal seems to have lost its gilt-edged status, and is perversely behaving just like other commodities.
In 2011, the correlation of gold (in US dollar terms) with the Reuters CRB Commodity index was negative 0.48, indicating that gold prices actually rose when commodities fell. By 2012, this turned into a positive correlation of 0.5. By now, the correlation is even stronger at 0.8.
With gold beginning to move in step with other commodity investments, its safe haven status seems to be in doubt. It is possible that investors are shifting form the yellow metal to the greenback. The US Dollar index is up three per cent for the year.
Fickle lot
Trends from the past also show that investors are the most fickle lot when it comes to buying gold.
Quarterly demand statistics over the last five years show that, on four out of five occasions when gold prices declined by 10 per cent, there was a significant drop in demand for gold-ETFs and gold bars.
Take the year 2008. Between March and May that year, gold price corrected 17 per cent to a low of $852/troy ounce.
Gold ETFs such as the SPDR Gold Trust saw their own gold holdings drop quickly, reflecting investor pullouts, as gold prices tanked.
In the April-June quarter of that year, retail investment in gold bars, coins dropped by nine per cent.
Indian investors proved even more skittish. Investments in coins and bars dropped 40 per cent during this period.