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Gold prices have shrunk some 9% in December so far, with Friday’s PM London fix of $1594 being down some $158 in only twelve trading days. After two months of shrinking US investor demand, the past week has brought buyers out in droves, despite the upcoming Holidays.
Gold is still up substantially in 2012, a year which began with gold at $1388.50. As the “Lex” column in today’s Financial Times points out:
“Rumours of the demise of gold have been exaggerated so often in recent years that seizing on its recent slump smacks of recklessness. Taken at face value, its price drop is hardly catastrophic. Gold is down a little more than 16% from the all-time nominal high it reached in September; it remains up nearly 12 per cent year-to-date. That may be less than it delivered in 2008 and 2009, when it rose 25% and 29% respectively. But it beats nearly any broad equity or fixed income index over one or three years, with the notable exception of US Treasuries.”
In what can only be described as a year of international tumult, it is not surprising that gold has been at the forefront as a ‘safe haven’ for those worried about the potential for higher inflation, the soundness of financial institutions, and the increasing sense that, in a world seemingly flooded with debt, all currencies are suspect as stores of value.
Looking back at gold prices in 2012, the real anomaly occurred after gold hit its summer low of $1483 on July 1st, and then made a spectacular run of over $400 in barely two months time, fixing at $1895 on both September 5th and 6th.
Since that ‘twin peak’ event, gold has essentially meandered. And the recent fall in gold prices has caught the attention of the financial press.
In Liam Pleven’s Wall Street Journal article of 12/16/11, “Gold Experiences an Identity Crisis,” (“With safe havens like this, who needs risky assets?”) Hayden Atkins, an analyst for Macquarie Group, opines that “When things get seriously bad, you might want to have cash instead of gold.”
Certainly that has been the trend over the past couple of weeks, wherein worries about the European situation caused nervous investors to dump the euro and buy the dollar, sending gold prices tumbling in dollar terms. Macquarie’s Atkins points to an “optimal level of concern” which favors gold. The right measure of concern makes gold a rational choice for investors, whereas a genuine panic will cause those same investors to ignore long term concerns about the dollar, and seek the safety of simple cash money, at least for a while.
Elsewhere, the failure of Jon Corzine’s MF Global, and its missing $1.2 billion in customer funds, has effected many commodity traders who traded there, including not only hedge funds, but also smaller accounts such as farmers, and coin and bullion dealers (in the interest of full disclosure, our company never dealt with MF Global). Many of MF Global’s customers who had physical gold and silver on account there (and whose accounts were subsequently frozen, preventing any trading), are now learning the risks of letting an outside party hold their treasures.
Erin E. Arvelund wrote an article “The Silver Rush at MF Global” for the 12/19 issue of Barron’s, leading off with this: “It’s one thing for $1.2 billion to vanish into thin air through a series of complex trades, the well publicized phenomenon at bankrupt MF Global. It’s something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%. That in essence, is what’s happening to investors whose bars of silver and gold were held through accounts with MF Global.”
“The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets – gold, silver, cash, options, future and commodities – into a single pool that would pay customers only 72% of the value of their holdings. In other words, while trader already may have paid the full price for delivery of specific bars of gold or silver- and held ‘warehouse receipts’ to prove it- they’ll have to forfeit 28% of the value... That has investors fuming.”
The article goes on to detail the battle among the bankruptcy trustee, hedge funds and other customer of MF Global, and the Chicago Mercantile Exchange and Comex, which is owned by the publicly-traded CME group. This will all be a mess to sort out, with lawsuits stretching out over the next few years, no doubt.
In the end, one lesson taught will be this: Gold and silver are a lot less precious when only represented by a piece of paper.
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