Chief economist at The Henley Group mwh@thehenleygroup.com.hk
"Several fundamental factors recently indicated an imminent rise in the price of gold."
Golden time to load up 04/03/2013
Several fundamental factors recently indicated an imminent rise in the price of gold. Japan's de facto currency devaluation, data showing record gold imports by China and Russia and Spanish sovereign debt reaching 146 billion euros (HK$1.474 trillion) should have triggered another spate of gold buying, raising the price of the precious metal.
Instead, it fell - even after France's labor minister, in uncharacteristic candor, said that his country is bankrupt.
So what happened? Well, according to the experts, several other factors are at play. The most notable is the apparent expectation by an increasing number of investors that the euro zone debt crisis will soon be a thing of the past.
Also, news that billionaire investor George Soros sold gold late last year tempered the allure of the yellow metal.
Then, minutes showing some members of the US Federal Reserve rate-setting committee thought it about time to start considering ending the central bank's monthly bond-buying initiative - more popularly known as quantitative easing.
Lastly, Western powers may have been eager to keep the price of gold trending lower just before the G20 summit, so their leaders could declare with a straight face that there is no currency war and no debt problem.
Rising gold prices would have hurt their credibility since the price of the precious metal remains one good indicator of global currency debasement. So, where are we headed now as far as the gold price is concerned?
Well, firstly, it is unrealistic to expect a quick resolution to the euro zone's debt problems.
Just look at the recent developments in Spain as mentioned above. Then take a peek at Italy, the euro zone's third largest economy.
Regardless of the present political theater, the simple reality is that the country is hopelessly broke - no matter who is in charge.
It is unlikely to be able to service its 2 trillion euros worth of sovereign debt for much longer.
And surely, the debt problem is getting worse in the leading developed and supposedly safe-haven countries.
The latest indication of this worrying trend is Britain losing its AAA rating from Moody's Investors Service.
As for the Fed phasing out QE, well, this is really a tall order for US authorities. They cannot do this even if most members of the Fed's rate-setting panel and powerful politicians backed the move.
Just giving any sort of timetable for phasing out quantitative easing would spark a rise in Treasury bond yields, thereby escalating the US sovereign debt problem.
The world's largest economy cannot afford this, given that it is carrying an unfunded liabilities burden of US$202 trillion (HK$1575.6 trillion). So if QE came to an end, the US would face its worst debt crisis in no time.
US authorities therefore either have to continue printing money or face the onset of a massive sovereign debt crisis right at home - with both factors likely to push up the price of gold.
And for those concerned about what Soros says or does openly, they would do well to remember that he called gold the ultimate bubble in 2010 - just before massively buying the metal for his fund, records later showed.
So for all we know, he may already be buying the metal again, taking advantage of the negative view on gold, that his action helped to create. Either way one should probably be well advised not to pay too much attention to Soros.
Finally, putting the recent correction into historical context, it should be noted that price corrections in gold are normal from time to time.
In fact, we have seen similar and larger corrections over the past 10 years that now look like little more than small blips on a long-term chart.
And going back further in history, perhaps even more interestingly, the massive US$850 price spike in the 1980s occurred just after a 50 percent crash in prices.
So gold investors should not panic and sell at this point - if anything make use of the lower price to accumulate the precious metal.
