The yellow metal started the year at $1,676 per ounce, but had fallen to as low as $1,322 on April 16, with recent price volatility particularly marked.
In fact, at the time of writing, gold was down some $200 in less than a week, representing the worst sell off in 30 years. And as gold bullion prices have weakened, so have the shares of gold producers in tandem.
There does not appear to be any particular trigger for the recent sharp price falls. However, the headwinds for gold had been building throughout the first three months of the year.
In particular, the improvement in US economic data – especially the pick-up in the US labour market – has been a negative factor for the metal.
This is because the continuation of the Federal Reserve’s quantitative easing programme is contingent on unemployment staying high. Low interest rates and abundant global liquidity have been very supportive for gold, while there have been fears that ultra loose monetary conditions will cause inflation further down the line.
Interestingly, more recently we’ve seen heightened activity on the futures market, with lots of money flowing out of gold ETFs.
There is also some speculation that short sellers (perhaps working in concert) have taken advantage of gold’s lack of response to the Cypriot bailout, Italian elections and Japanese monetary easing.
The strengthening US economic recovery is the reason why investors are reducing exposure to gold equities.
The pinch point for the gold industry in aggregate will be when the gold price reaches roughly $1,200, as this is the estimated cost production of the metal.
At this level, many producers will struggle, although of course there are many gold miners that can survive and be profitable. These are the lowest cost producers and the owners of gold assets with the longest lives, and it is these that represent a buying opportunity for investors.
Neil Gregson is portfolio manager in the JP Morgan Asset Management global equities team
