A Game of Two Halfs for Gold

July 9, 2013 at 05:21


Investors in gold funds, whose value slumped a record $44.7 billion in the second quarter, may do better in the second half of the year if history is any guide.

Gains averaged 1.3% in the second half from 1981 to 2000, when gold endured a two-decade bear market. First-half losses averaged 3.9% in the period.

Investors sold 404.4 metric tonne from exchange-traded products backed by the metal in the second quarter as prices tumbled into a bear market in April. Gold is poised for the first annual drop in 13 years after some investors lost faith in the metal as a store of value.

The rout already strengthened demand for jewellery and coins around the world and the second half of the year usually sees gains in physical demand for wedding seasons and religious festivals in Asia, including India and China, the biggest buyers. “The physical trend has always been very seasonal,” said Bernard Sin, the head of currency and metal trading at MKS (Switzerland), a bullion refiner in Geneva.

“Physical players are a different breed. They are always buying on the dip. Physical support will continue to be present and it will definitely trigger interest.”

The metal returned an average of 11% in the second half of the year during the bull market that began in 2001, more than double the average first-half increase. Demand was stronger in the second half in nine of the past 12 years, according to data.

Gold for immediate delivery dropped 27% to $1,226.63 an ounce this year in London. The metal fell 23% in the second quarter, the most since at least 1920, according to data compiled by Bloomberg.

Former US President Richard Nixon severed the dollar peg to gold in 1971 and the government lifted curbs on citizens owning gold at the end of 1974. Investors accumulated a record 2,632.5 tonne through ETPs by December amid unprecedented money printing by central banks.

Federal Reserve Chairman Ben S Bernanke said on June 19 that asset purchases may slow if the economy improves. The US Dollar Index on Monday reached the highest level since 2010. Gold plunged 11% in June as India, the biggest buyer, imposed curbs on imports to trim its trade deficit. The country’s imports may drop 52% in the third quarter, according to the All India Gems & Jewellery Trade Federation.

Imports into Turkey, the fourth biggest consumer, more than doubled to a 4 1/2-year high of 45.5 tonne in April. They held above 43 tonne in May and June, the longest run in data on the Istanbul Gold Exchange’s website going back to 1995. Jewellery represented about 60% of the country’s consumer demand for gold last year, according to the World Gold Council.

Bullion for immediate delivery in China, the second-biggest user, averaged about $37 more than the London price since mid-June, Shanghai Gold Exchange data show. It was about $21 this year before then. The increase signals strengthening demand, Standard Bank Group said July 3.

While lower prices will make physical purchases more attractive and mining less profitable, there’s been a “dislocation” between the physical and investment market in gold over the past several months, said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.

“Given the size of the paper market in ETFs and futures, the physical market is often having more of a psychological than actual impact,” Hansen said. “For now though, rising interest rates and a stronger dollar will keep gold under pressure no matter how strong the physical demand.”