'Gold enters bear market as price plunges' shrilled the Daily Telegraph on Friday, as the decline in the gold price gathered pace. Helpfully, the paper then 'loosely' defined what it meant by a bear market – a 20 per cent decline in value of a given asset from a peak.
Even allowing for the late rally in London that caused the PM spot fix to be set at over US$1,500 rather against the run of play, we are still now technically in a bear market, as the intraday peak, hit as recently as September last year, was US$1,921.41.
Just to rub it in, the price at the close on Comex was well below US$1,500.
What does this all mean? For one thing, it means that Jim Sinclair is hopping mad. The truculent gold bull has been muttering darkly about "take-downs" and market manipulation by the Chinese and Russians for some weeks now. Last week some of his less palatable nightmares came true.
Why only less palatable? Well, in spite of Jim's smouldering, as a high functionary in the empire that is Forbes & Manhattan pointed out to Minesite last week, gold at US$1,500 is still a pretty good price. Ten years ago, there were parties when gold went up, through US$400.
Even the most apocalyptic of bears, don't see a price like that on the horizon any time soon. Alright, Cyprus may be a seller, and perhaps more significantly Portugal too. And alright, investors in general are dumping their ETFs and moving into equities.
But as Rob Davies points out in our Commodities roundup this week, the opportunity cost of holding gold has never been lower, as long-term interest rates on all the major currencies are running at less than two per cent.
But sentiment is a fickle mistress and many a perfectly rational trader will be selling into this market against his better judgement, on the basis that come what may a wider tide of selling will be bringing down valuations across the board, no matter what kind of clever analysis is brought to bear to show that such selling is unjustified.
One or two hands are already reaching out to catch the falling knife, but they are few in number, and probably not enough yet to cause a major reverse. Certainly the junior gold miners will continue to suffer for the time being.
But valuations are beginning to look compelling. The real trick will be for companies to convince investors that the rewards for returning to the junior space really will be substantial. In the copper sector Central Asia Metals has managed to return to shareholders 27 per cent of the money it raised from them at IPO, and all within the space of a couple of years. Can any of the junior golds say that?
No? Until they can, ETFs will remain the preferred option for all but the most clued up and risk-on of industry experts.
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