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Gold: what happened to the security bid?
by David Campbell on Oct 10, 2013 at 14:47
Gold investors apparently didn’t get the memo last week: as the US government remained resolutely closed and investors remained broadly but calmly risk-off, the gold price was once again plummeting.
Having been widely tipped as the go-to beneficiary of policy paralysis and a plunging dollar – alongside the thinking man’s safe haven asset for much of the past five years – this was unexpected.
‘US Treasuries and gold are likely to stay in demand,’ Capital Economics confidently predicted at the beginning of the week.
However, the spot rate fell more than 3% from $1,326 to a low of $1,285, almost exactly where it found support in the July sell off.
It later clawed back earlier falls but could not pull itself back up to its starting point, ending the week at $1,315.
Gold volatility rose from an index value of 22.68 to 25.25, well above the S&P 500 Vix value of 9.92, scarcely changed over the week. So if the US crisis deepens which way will it go?
Answering that question depends on how you interpret the fall.
‘Some rationales we have seen have included a distressed seller, the start of quarter rebalancing, a lack of response to the government shutdown and the potential for its quick conclusion,’ said Nomura analyst Matthew Kates, revealing how broad the spectrum of opinion was.
He threw his own suggestions into the pot. ‘It is China’s Golden Week holiday. For seven days, China is effectively on holiday. [And] changes to import regulations have effectively frozen India’s import market.’
Of these the latter seemed most persuasive, with the ‘Indian premium’ for physical gold falling $40 a month ago to closer to $5 last week. Which goes some way to explaining the immediate price action, but nowhere towards explaining what has happened to the previous security bid.
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