Looking behind the dramatic drop in gold prices

Gold prices plunged dramatically during the Songkran Festival, marking the biggest drop in 30 years. What are the key factors behind the latest loss of its glitter?

Thanarat Possawong, managing director of Hua Seng Heng Gold Futures, said: “Before the Songkran Festival, the world gold price was around US$1,560 per ounce. However, it plunged dramatically to $1,370 when we came back from the long holidays – down nearly $200 per ounce or more than 10 per cent.

“That’s a huge loss in a matter of days. When we returned to business on Wednesday, our gold shops were overcrowded even before they reopened. The local gold price went down Bt2,350 per baht weight. It was the biggest price drop in a single trading day.

“Later on, there were rebounds, but the big picture is that the price went down well below the support level of $1,520 per ounce.

“Investor sentiment is now very important, as we have witnessed recently regarding news reports like the one that Cyprus would sell about 10 tonnes of its bullion reserve to raise funds to tackle its economic crisis. That’s not a large quantity for a central bank, since the trading volume in Thailand is already around 6-7 tonnes per day.

“After Cyprus, it was speculated that Spain, which has about 280 tonnes of gold reserves; Italy, which has another 2,400 tonnes; and Portugal would also sell bullion from their reserves. This led to fears, and the price breached the $1,520 per ounce [level].

“However, the euro-zone countries have a commitment not to sell gold reserves exceeding 400 tonnes in a given year, so it’s not possible for Italy to sell more than such a limit (in the event that it decides to do so at all).

“Another factor is electronic or online trading on the Stock Exchange of Thailand and other platforms including that of Hua Seng Heng as it’s more convenient, thus leading to a surge in volume and exacerbated the situation when many investors decided to cut their losses and sell.

“All these factors are probably more crucial to George Soros’ recent pessimistic view of gold prices.”

Thailand Futures Exchange president Kesara Manchusree said: “At TFEX, we trade gold-futures contracts of 50- and 10-baht weights. There are both losers and winners in volatile markets. The last major plunge was in September 2011 when the price was down by around $100 per ounce. Since 2000, the gold price has been on the uptrend because of the lack of investor confidence in other assets, especially the US dollar.

“Since the start of this year, the average trading volume has been around 13,000 contracts per day. Because of the increased market volatility, we have required a higher deposit per contract.”

Kamolthan Pornpaisarnpichit, director of research at GT Wealth Management, said: “The breach of $1,520 per ounce was significant. Over the past 18 months, gold had dropped from the all-time record high of $1,920 in September 2011 to the range of $1,520-$1,800 per ounce. Once it breached the $1,520 support, the plunge was dramatic because of selling pressures based on the technical analysis. The support now is around $1,300 per ounce.

“In the local gold market, it is translated into around Bt18,400 per baht weight based on the exchange rate of Bt28.6 per dollar.

“Regarding the United States’ quantitative easing measures, the current round is limitless, as the Federal Reserve is buying assets worth $85 billion every month until the US unemployment rates falls below 6.5 per cent from the current 7.7 per cent.

“Between 2009 and 2011, gold gained dramatically as investors were worried by the implications of QE1 and QE2, as these massive injections of liquidity would lead to asset-price bubbles and inflation.

“Gold prices jumped to record highs on expectations on these QEs. Now, it’s QE3 and QE4 and the exit from this unprecedented policy. Once these QEs are over, gold prices will drop [ending gold’s role as an inflation hedge]. Negative sentiment has prevailed over gold prices, which have been on the uptrend over the past 12 years. It’s probably the start of the down cycle for bullion.”