Trading Desk
The gold illusion
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Martin Raab
Investment-Stratege
Large buyers drove the gold price to record levels. Now both the demand and the arguments for panic buying are lacking. Attractive puts, on the other hand, are luring the first traders.
What do pirates bury, what do investors and central banks hoard when they can’t think of anything better and panic reigns? That’s right, gold. The price of gold was the superstar among commodities. It shone brighter than Jeff Bezos’ previous bank account and rose by 21% since March to a record high of USD 3,500 per ounce. The “gold rush” was ostensibly caused by the “customs chaos days” and concerns about the dollar, while behind the scenes some central banks have been driving up the price with massive gold purchases since the turn of the year. If you analyze the latest statistics from the World Gold Council, you will see that the five largest buyers, consisting of the central banks of Poland, China, Kazakhstan, the Czech Republic and Turkey, bought the equivalent of CHF 6.5 billion worth of gold bars on the market between January and April. No wonder that everyone trading in gold was calling for higher prices every hour.
Central banks pushed without limit
However, the market is now hearing that the gold party is cooling off, as the big buyers are fed up. China’s reserves of 2,292 tons are temporarily full, and other central banks have realized that gold is tempting but not very practical. Moreover, the price of gold is set in US dollars, which gives physical gold bullion less protection in the event of a weaker dollar. Some “large buyers” had not considered this three months ago when they frantically ordered gold from investment banks – mostly without limits.
Outlook: Lower but no crash
Gold will soon feel more like a precious metal with jet lag. The risks of an escalation in the Middle East can now be assessed and customs chaos 2.0 will be experienced in two to three weeks with moderate losses on the equity and bond markets. The gold rally will recede to USD 2,800. The US dollar could gradually strengthen slightly against the franc and euro, making gold less attractive. A big unknown here is the US Federal Reserve and its interest rate policy. If real interest rates fall, the interest-free bars are not quite so bad, but it does not look like this will happen – the interest rate mountain is more likely to remain stable.
If you want to trade risk-consciously now, look for puts on gold or sell gold futures. Anyone buying gold is either very nervous or wants to have something tangible in their vault. The fact is: the “large buyers” are all gone for the time being. This puts downward pressure. But as always on the stock market, if you are late, you will be punished by the spot price – which in the case of gold will probably soon be well below USD 3,000.
