If, as we have said before, you can tell something of a market from how it behaves under adversity – then what does today's surprise fall to a five-month low to key technical support on the trendline tell us?
Gold has been on an extended vacation for a few months and its performance has been lackluster. Witness the decline in Comex open interest and the lack of momentum in the charts. OK, so it has been caught in the cross currents of a deepening European financial crisis (prima facie bullish), the corollary to which is a firmer US dollar (prima facie bearish). But worst of all it has failed to adopt either argument with any real conviction. It has, well, just sat there, observing. Hardly the action of arguably the most important bell-weather in the financial sphere.
This morning two major pieces of market news – firstly, the Indian government have performed a U-turn on the proposed doubling of duty on gold jewelry imports and secondly, Chinese Q1 2012 demand has rocketed – up sixfold year-over-year – these are news stories of seismic importance. Neither elicited a move greater than the typical bid/offer spread of the spot price... nada.
It is less clear why gold has fallen so sharply – it could as well be attributed to Euro weakness on a deteriorating Greek situation (are the Greeks losing their marbles ? – English joke) – or possible selling of oil by Iran to China in exchange for gold, leading to a spot gold sale to close out the trade. Or possibly a significant short position placed on gold by Berkshire Hathaway who seem to be at war with this asset class. Buffett's right hand man is quoted as saying "Gold is a great thing to sew into your garments if you're a Jewish family in Vienna in 1939 but civilized people don't buy gold – they invest in productive businesses."
More likely and simply gold may be suffering from investor fatigue – something I remarked upon at the recent Dubai gold conference. This very much resonates with us. Many of us associated with the gold market have benefitted from the creation of a number of new products, distribution channels, and mediums through which metal is traded – a proliferation of ways of gaining access – but almost no serious innovation for the best part of five years.