Professional investors are cautious about the outlook for gold, writes Eric Johnston.
Long seen as the safest of safe havens during times of turmoil, gold is suddenly looking very shaky.
In a wild week on the markets, the precious metal buffeted as though it was one of the speculative explorers on the stock exchange, whose fortunes often turn on a discovery or a dry sample.
The price collapse means the 80 tonnes of gold held by the Reserve Bank of Australia, some of it sitting in vaults deep below its Martin Place headquarters in Sydney, have fallen in value by nearly $1 billion.
Since hitting a record high of $US1900 an ounce two years ago, gold has now fallen 26 per cent.
On Tuesday, the price fell by a stomach-churning 13 per cent, its biggest single-day decline in 30 years, taking with it many of Australia's big gold miners including Newcrest, Kingsgate and St Barbara.
Several sharemarket analysts at companies such as Goldman Sachs and France's Societe Generale have called an end to the era of extraordinary golden gains.
While optimists still predict rising demand for gold from fast-growing consumer demand in nations such as China, some are worried the metal's bull market, that began in 2001, could be headed for a repeat of its 1980s meltdown.
So what went wrong?
Few analysts can point to a single event over the past week that triggered the rout on global markets.
Rather, there has been a confluence of pressures.
These include a plan by troubled eurozone member Cyprus to sell some of its gold holdings to help top up its depleted cash reserves - which has in turn sparked fears that other cash-strapped European countries could follow suit.
Some analysts point to a massive sale in gold reserves held by investment funds known as exchange traded funds, or ETFs, as well as the broader shift by investors back into equities.
Significantly, there has also been a cooling of fears that the massive stimulus programs around the world - led by the US Federal Reserve - would lead to uncontrollable inflation. Indeed, even with interest rates in the US close to zero, this has led to only modest inflation.
Some investors also point to the increased use of ultra-fast electronic trading, which could have accelerated the size and scale of the price plunge.
Professional investors who have used ETFs as a way of securing exposure to gold have seen billions of dollars flow out from the funds in recent months. More than $2 billion has been pulled from the US-listed SPDR Gold Trust, the world's biggest bullion-backed ETF, in the past week.
Commonwealth Bank mining and commodities analyst Lachlan Shaw says no single factor sparked the sudden exit from gold.
Indeed, even if Cyprus sold its entire 14 tonnes of gold, this would not be enough to spark a price crash, he says. But there are wider fears the 300 tonnes sitting in the vaults of troubled European countries - including Spain and Slovenia - could also hit the market at some point. Even so, much of the falls have the hallmarks of the popping of a "speculative bubble," Shaw says.
Anyone who bought gold in April 2003 has done far better than the average sharemarket investor. Even after the recent decline, gold is still up 320 per cent. Over the same 10-year period, the S&P/ASX 200 index has risen 65 per cent.
The price volatility means some miners will have to take a more cautious approach in bringing new projects to market. A lower sale price means gold that is deeper or harder to extract will result in substantially lower profits for some producers. Some executives at the bigger companies have cautioned that job losses could follow if costs needed to come down further.
Andrew McIlwain, the chief executive of Unity Mining, which oversees the Henty gold mine in Tasmania and the Dargues Reef gold mine just south of Canberra, says most gold miners will be taking a close look at their costs.
"The quite dramatic drop in the gold price caught a lot of people unaware. Everyone has lost some margin in their production and those at the higher end of the cost scale are going to feel it much greater".
For Unity, the average cost of extracting just one ounce of gold is now below $1000.
"At these levels, we're still making money," McIlwain says.
"The halcyon days of $US1700-$1800 an ounce look a bit further away for us. Thankfully, we've been putting cash in the bank but there are going to be some miners who are going to find it pretty tough over the next few months.
"I've been around when gold was below $US300 an ounce and we had to be pretty tight to make money at that stage."
McIlwain says some producers may not have the flexibility to change the cost of production. At the same time, labour costs remain high, given booming conditions in other parts of the mining sector such as iron ore.
From the nuggets dug from Kalgoorlie's yawning super pit - one of the world's richest gold mines - to those extracted from remote seams at the top of the Peruvian Andes, gold remains the most precious of metals.
It is estimated that a little more than 171,000 tonnes of gold have been mined over history. To put this in perspective, if this was melted into a super bullion, it would fill the equivalent of two Olympic-sized pools.
To underscore how rare the metal is, the soaring price of the gold in recent years translated to only a modest increase in production from the world's mines. Global output increased just 0.6 per cent last year.
Gold is perhaps the most unique commodity. Unlike copper or iron ore, the price fundamentals of gold are not driven by supply and demand or economic output. Rather it is influenced by a mixture of interest rates, the outlook for inflation, moves in global currencies and the balance sheet of the US Federal Reserve.
Since gold pays no income (or yield) and has limited industrial uses - with most sales going to jewellery and some to electronics - the metal is notoriously hard to value. Much of the attraction for gold as an investment is that - despite swings - its value has risen, on average, in real terms since World War II. While the price surge in the late 1970s was driven by people protecting themselves against rampant inflation, the more recent acceleration was a result of investors taking shelter from sovereign risks during the financial crisis.
"In recent years, economic uncertainties and risk sentiment have elevated gold prices while global GDP growth has remained moderate at best, Societe Generale's Patrick Legland says in a report titled "The end of the gold era".
He points to copper, the most cyclical of commodities. The metal's price has gone from $US7060 per tonne following the collapse of Lehman Brothers to about $US7400 per tonne today. By comparison, gold's price has almost doubled over the same period. "A negative [global GDP] outlook is clearly positive for gold. Similarly a positive economic outlook - all else being equal - would dent gold's price outlook but pull up other commodity prices," Legland says.
One of the world's most influential mining investors, Evy Hambro, remains upbeat on the outlook for the yellow metal.
In a conference call with investors, Hambro, who oversees the $5.3 billion BlackRock World Gold Fund, says the outflow of the "hot money" that was in the market was behind the fall.
"However, in terms of the overall role of gold in the portfolio as a long-term play, the fundamental drivers have not changed. People taking longer, more traditional positions are not likely to sell."
Some, such as Newcrest Mining chief Greg Robinson, have tipped that gold could top $US2500 an ounce. Newcrest ranks as Australia's largest gold miner, and Robinson told the Melbourne Mining Club last year that the metal could trade somewhere between $US1500 an ounce and $US2500 per ounce over the next few years.
His estimate was based on the devaluing of US and European currencies, and a "strong gold culture" in the emerging middle classes of India and China.
Retail investors saw the price crash as a chance to plunge into the market. Retailers from Sydney's Australian Bullion Company to the Perth Mint reported packed sales rooms, with dozens of people waiting outside to snap up what they regard as bargain-priced gold.
Similar scenes were witnessed across China, Hong Kong, Thailand and India. Retailers said the demand for bullion and coins started picking up from last Saturday when gold jitters were sweeping the markets.
Peter August, the chief executive of the Melbourne Mint, which buys and sells gold bullion to the public, says a clear disconnection has occurred between the physical market and the "paper" market of Wall Street.
"People are becoming a lot more savvy with prices going down, seeing this as being a buying opportunity. "If this was a bubble as some people suggest, then you'd have people rushing out trying to sell at the same time.
"People remain concerned
about counter-party risk in
owning shares or bonds or even currencies, whereas gold has no counter-party risk." Gold is scarce and remains a safe haven, he says.
Still, professional investors are becoming increasingly cautious. In the past few weeks, there has been a swathe of downgrades for the gold price. Societe Generale is looking at an end-year price of $US1375 an ounce, with an average price of $US1500 for the year. Goldman Sachs is targeting $US1450 an ounce by the end of the year, and expects this to fall to $US1270 next year. Shaw is more upbeat, with a target of $US1604 by the end of the year.
Over the rest of this decade, however, he expects gold to settle around $US1150.
Gold's sudden reversal has also played out among Australia's listed gold miners, with many heavyweight stocks suffering double-digit falls over the past week. Richard Coppleson an institutional broker with Goldman Sachs, widely regarded as a sharemarket bull, remains blunt in his assessment of the heavy metal.
"This is not a consolidation, but it's an old fashion collapse. I'm still staying away from gold," he says.