THE DISTILLERY: Golden revelations

Commentators clamour to decipher gold's future, with one saying its lengthy bull run has left some careless miners exposed.

One gets the impression that Australia’s business commentators relish and dread the prospect of talking about the gold price. Physical, strategic and speculative buyers with varying opinions on gold’s status as a safe haven or not collide with an industry buoyed by a 10-year bull market that’s been skewed by central bank buying. With the precious metal booking its largest single session falls since 1983, the historic numbers mean our business scribes have to have a crack. Let’s see how they go.

The Australian Financial Review’s Chanticleer columnist Michael Smith writes that the gold market’s bull run, reinforced by the precious metal’s perceived safe haven status, has encouraged the miners to ramp up production, rush acquisitions and, in some instances, wind back hedging.

“All these factors have left miners exposed if – and many are now saying ‘when’ – the music stops. The 14 per cent fall in the spot price of gold since the start of April has caught everyone off guard. Gold fell to a two-year low for the second straight session on Tuesday, building the momentum of a steady decline since October. It has also resulted in a frenzy of broker downgrades and some panic selling as analysts warn mines will be closed or production overhauled in high-cost Australia. This is something the miners are vehemently denying. They do have a point when they say it is premature to make those kind of decisions based on an assumption the price of gold will continue falling, which no one is still really sure about.”

Fairfax’s Malcolm Maiden breaks the trading in gold down to three tiers – real, strategic and speculative. The collapse has come from a dive in speculative sentiment, which can be reversed.

“On one estimate by a gold fund manager, trade in gold futures on Friday and Monday equalled 112 per cent of annual gold production. It was almost exclusively on the selling side, with hedge funds believed to be at the vanguard. It may in other words have been a similar pack attack to the ones mounted before and after the global crisis on vulnerable companies and, in Europe, vulnerable countries. That gives you a clue to what gold could do in the near term. Traders who opened up short (sold) positions in the futures market on Friday and Monday pushed the metal down through two critical support levels, and locked in profits as the gold price gapped lower.”

The Australian’s John Durie is in step with Maiden when he pointed out that gold was actually rising at the end of yesterday’s session, though it would be “a brave person” to buy in because fundamentals have taken a back seat.”

“Market chatter centred on massive sales of short positions by Goldman Sachs and Merrill Lynch as being behind the sell-off, which may be true, and the fact is rational arguments can be made for why gold prices should be rising and why they should be falling. Suffice to say, it is ultimately driven by mass liquidations of global hedge fund positions.”

But the hedge funds have clearly picked one argument over the other. The Australian’s Barry Fitzgerald, an enormously respected resources columnist, has an answer for his readers.

“The apparent lack of need for that haven status is the most proffered reason for the almighty sell-off in the metal. The idea there is that if gold could not hold in the face of Europe's fiscal woes and Japan's efforts to spend its way out of an economic deep sleep, then it didn't deserve to. And with inflation a non-event in the US, keeping super low interest rates in place and helping drive industrial company yields higher, the need for gold in the portfolio has diminished. Maybe so. But you've still got to wonder how before last night's price recovery – in early trade at least – gold had plunged $US210 an ounce in the space of a couple of trading days. The decline was on a scale not seen for decades, which no doubt will prompt calls from the gold bugs out there for investigations into their (regular) accusations of market manipulation. Using history as a guide, the calls will fall on deaf ears.”

The Australian Financial Review’s Matthew Stevens writes that there’s a bit of a discrepancy between the utterances from Citi to American investors that the death bells of the resources boom will be felt over 2013 and the experience in Australia. Hey Yanks, we’ve know about this for yonks.

“It is informative, I think, that Citi’s message came only days after Deutsche Bank’s locally based resources team concluded that now was the ‘time to be brave’, that the local mining sector had been oversold and was being traded at a discount to price forecasts and, in the majority of cases, to their net present values. The paradox here is not as gaping as it seems. Because, while Citi’s belling of the commodities cat for US investors merely endorses a view already well-rooted in our market, the new investment thesis it offers is reasonably aligned with the Deutsche Bank view. In the end, Citi reckons that the passing of the supercycle leaves investors at the dawn of a ‘new decade of opportunities based on how individual commodities will perform against one another and against broader market indicators such as equities or currencies’.”

Most commentators on this issue point out the importance of central banks around the world, but Business Spectator’s Stephen Bartholomeusz notices two additional things. Firstly, gold came off its highs when equities started taking off late last year – not entirely surprising. Secondly, the fall in gold prices gained speed last week when the Federal Reserve inadvertently released its March minutes.

“The Fed accidentally emailed the minutes to more than 150 people, including some of the world’s largest banks, a day early. Whether it was the lack of concern about the prospects for inflation, the musings about ceasing the QE purchases before the end of this year or the worries about the unintended consequences within markets that unsettled investors is unclear but something in those minutes appears to have spooked markets already uneasy because of the fresh instability in Europe and a weaker growth outlook for China. Certainly, if the market believed the Fed’s asset purchases – which have kept interest rates low and funnelled flows of funds into other markers – were likely to end in the near term, it would act in anticipation rather than waiting for the announcement that the program would end. Perhaps that’s what we are now seeing – the unwinding of positions that had little to do with economic fundamentals or risk assessments.”

Fairfax’s Elizabeth Knight appears to suggest that Australian mining company share prices that aren’t gold producers have been hit by the slump in the precious metal, only to then hedge her bets that it could be an overreaction to China’s latest economic data.

The Australian’s Richard Gluyas argues that the key reason why business credit has been so poor while the economy has been expanding at a rate above trend is because the mining boom was largely funded by cashflow. This made up a sizeable portion of the construction capex.

Now that prices are coming off the boil and the construction boom is ending, this means it will be that much more obvious.

Fairfax’s Tim Colebatch reports on comments from respected economist Ross Garnaut (one of the authors of the Australian dollar’s float), who says the Reserve Bank of Australia might have to intervene to bring the currency down to reduce the severity of the recession. Oh yeah, he believes there’s a recession coming.

About time! How long’s it been?