This year has been a bad one for gold bugs, and it’s likely to get worse.
Prices fell 20 percent this year to $296.90 an ounce on the Comex division of the New York Mercantile Exchange after central bank sales jolted the market, reducing the metal’s traditional allure as a store of value. Central banks, which hold a third of the world’s gold reserves, are expected to keep selling and prices, already at levels last seen when Ronald Reagan started his second term as president, are poised to fall further.
“I’ve been convinced that speculators are going to use the central bank issue as an excuse to push prices as low as $285 an ounce,” said Bernard Swanepoel, managing director of Harmony Gold Mining Co. in South Africa. Harmony, which says it’s mining costs are the lowest in South Africa, spends about $315 to produce an ounce gold.
Few investors expect prices to rise any time soon, with inflation running at an annual rate of 1.8 percent.
“Almost no one runs to gold as a safe haven anymore - possible reserve sales from central banks keeps them away,” said Mark Anson, vice president and co-portfolio manager of Oppenheimer’s $95 million Real Asset Fund in New York. “We’ve been selling our gold holdings since the day the fund started in March.”
Gold for December delivery fell $3.60, or 1.2 percent, to $296.90 an ounce on the Comex Wednesday, the lowest closing price since March 15, 1985.
The biggest catalysts for falling gold prices this year have been sales by the Netherlands and Australia and plans by Switzerland to do the same. More sales are expected when Europe forms its new central bank as part of its planned economic and monetary union.
On Monday, Bank of England Governor Eddie George said the new central bank probably wouldn’t hold large quantities of gold in its reserves as returns are low and the metal is difficult to sell. Central banks of the 15-member European Union hold more than 10,000 tons of gold, 10 percent of government reserves worldwide.
“Central banks have finally woken up and realized that they need to apply modern financial methods to their assets,” said Anson. “Gold doesn’t appreciate like a stock, and it doesn’t pay a coupon like a bond.”
George’s comments followed an announcement by Germany’s central bank earlier this month that it was lending some of its gold in order to garner interest payments.
“Gold prices could fall $100 in a year’s time,” said Leonard Kaplan, a trader at Monex Deposit Co. in Newport Beach, Calif. “All it will take is another central banker taking a look at all the yellow stuff in his vaults and saying that he would rather have treasury bills.”
If prices remain where there are now - or fall further- a major shake-up in the mining industry is likely as companies shut down unprofitable parts of their operations.
The bad news for miners has been good news for consumers.
Sales to jewelry makers and coin collectors is booming, fueled by current low prices. And sales of U.S. gold bullion eagle coins have more than doubled so far this year, according to the U.S. Mint.