More Bounceto the per Ounce Gold Market

The metals championed by their proponents as a “store of value” immune to the vagaries of governments and their printing presses, gold and silver – known as “the poor man’s gold” – have, to say the least, proved disappointing. Prices had been falling since gold hit its high of $1,920 per troy ounce three weeks ago. But the gentle drop turned into a plunge at the end of last week, and both metals fell off a cliff on Monday, when gold reached a low of $1,534 an ounce, down 20 per cent from its peak. Silver fell 41 per cent from its August high.


The price falls came as a shock to investors who hoped precious metals would offer protection against events such as this summer’s intensification of the euro-zone debt crisis – or debasement of currencies through further quantitative easing.

As it turns out, when things really turn bad, “gold gets killed”, says the manager of a large US hedge fund. “It is hard to say that something that can fall 15 per cent in three days is a store of value. It is not a refuge from the storm.”

Much the same happened in 2008, after Lehman Brothers failed. Gold initially jumped in price. But when the stock market started its serious collapse two weeks later, gold followed – along with every risky asset.

Investors discovered that, in an interconnected world, all assets move together in a crisis. Just as in 2008, traders who had borrowed or used futures to invest in, say, shares or copper, last week had to stump up more cash to back the loans as prices fell. To raise money, they turned to the one part of their portfolios showing a profit – and that meant selling precious metals, hurting their price.

“People have been looking for places to raise cash and be able to take profits at the same time and gold is pretty much the only thing out there,” says Alan Brown, chief investment officer at Schroders, a fund manager.

The gold price fall, together with a dramatic reversal as it partially recovered during the week, pushed gold’s volatility – a measure of price swings – to its highest level since 2008.

The prospect of wild price swings could deter investors searching for security, the chief selling point of gold (its only serious use is as jewellery, but this is a minor factor in the price).

There are two big questions for investors. Does the recent fall mark the loss of haven status and the beginning of the end for gold’s decade-long bull market? If not, how long will it take for prices to recover?