Gold traders "still in shock" after "excessive selloff"

Wholesale market gold prices hovered around $1,380 an ounce Wednesday morning in London, little changed from a day earlier, as European stocks continues to fall along with most commodities and US Treasuries gained.

Silver hovered around $23.50 an ounce for most of the morning, also little changed from the previous day.

"In truth the gold market is still in shock," one London-based trader said this morning.

"A lot of damage has been done," agrees Dominic Schnider, head of commodities research at UBS Wealth Management.

"[But] if you look at the fundamentals, the drop was excessive and does not correspond to the reality that we still have a lot of troubles out there – debt monetization, real interest rates will remain in negative territory and the Dollar in the long run still is a currency that won't be that strong."

The world's biggest gold exchange traded fund SPDR Gold Trust (ticker: GLD) continued to see outflows yesterday, with the volume of its bullion holding dropping 8.4 tonnes to 1145.9 tonnes, 15% down on where it started the year.

In Asia by contrast, "people are actually buying everything, gold bars, gold coins," says Brian Lan, managing director of Singapore's GoldSilver Central.

"People are rushing to get a hand on it...it's the same for silver. So far sentiment seems to be improving. Even the price has more or less stabilized."

Some stores in mainland China, the world's second-biggest gold buying nation, ran out of small gold bars Tuesday, Hong Kong's Standard newspaper reports.

In world number one India however, "we don't see a rush even though the price has come off," one Singapore wholesale dealer told newswire Reuters this morning.

Shares in India's two biggest gold loan companies, Muthoot Finance and Manappuram Finance, saw 10% drops in both Monday and Tuesday trading. Both companies allow people to borrow money posting physical gold as collateral.

"High LTVs [loan-to-value ratios] leave limited cushion for correction in the value of security," says a note from consultancy India Research.

"An additional 10 percent correction in gold prices in the near future could result in a majority of outstanding loan amounts being higher than the realizable value of collateral, resulting in increased possibility of losses."

Manappuram said last month that it expects to lose some of the interest it owes as a result of lower collateral values, expressing particular concern about loans made towards the end of 2011.

Stock markets in Europe meantime extended their losses of the last two days during Wednesday morning's trading, with some money managers suggesting substitution into other territories.

"Fund managers in Europe are switching guns because they are seeing on the one side Japan with positive momentum and Europe just getting deeper and deeper into a recessionary environment," says Didier Duret, chief investment officer at ABN Amro.

The International Monetary Fund yesterday cut its 2013 growth forecast for the Eurozone, projecting a slightly sharper contraction, while also revising down Britain's growth rate.

Cyprus will sell some of its gold during the next few months, the country's finance minister confirmed Wednesday, contrary to an official denial last week.

"The exact details of it will be formulated in due course primarily by the board of the central bank," Haris Georgiades told Bloomberg TV.

Cyprus has 13.9 tonnes of gold, according to the latest World Gold Council figures. The European Commission said last week that the country has committed to selling around €400 million worth of so-called "excess" gold as it tries to raise enough to secure a €10 billion bailout. Since gold's price drop however, Cyprus's entire gold reserve is now worth around €470 million.

The government of Singapore, home to BullionVault's newest vaulting location, is in talks with the Singapore Bullion Market Association about launching a gold fix along the lines of the twice-a-day London Fix, where major bullion banks set a clearing price.

"While nothing concrete has been formed yet, we will continue to work with the SBMA to collate ideas on how to make the Singapore gold hub work for the industry," said a spokesman for International Enterprise Singapore.

About the Author
Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVaultBen Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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