BUSINESS NEWS - The simple answer to the question why gold is falling is the strength of the US dollar, up nearly 10% against the Euro since February this year. That, and the resilience of the US stock market. The S&P 500 index regained nearly 6% in the last two months after a nasty sell-off in January, proving the doomsayers wrong yet again.
Perhaps the real question is why the dollar is so strong? The US economy is on a tear. Corporate profits are the best they’ve been in seven years due to tax cuts, encouraging jobs reports and resilient consumer spending. That has hurt gold’s vaunted status as a hedge against risk, though technical analysts point out that it remains within the lower ranges of a rising wedge formation and should bounce. If it breaks below this level, there could be further sharp drops. Another reason gold is low is the prospect of higher US interest rates, which raises the opportunity cost of buying gold.
The gold price hit US$ 1 276 an ounce last Wednesday (June 20), a drop of nearly 6% since April. More concerning is the nearly 17% drop in platinum prices to US$ 861/oz since January. Palladium traded at US$961/oz, marginally up over the same period.
David Shapiro, deputy chairman at Sasfin Securities, says the strength of the US dollar, which has an inverse correlation to commodity prices, is one of the reasons for the drop in the gold price.
“The gold price has been relatively flat for nearly five years now and no-one has really got to the bottom of it,” he says. “Gold is supposed to be a hedge against crisis, but there are so many other hedges out there now. We’ve had a number of financial crises in recent years and gold still hasn’t responded.”
Platinum and palladium face an entirely different set of challenges. South African platinum producers are being squeezed on both sides: they have a low dollar platinum price to contend with, and high unit costs, says Victor von Reiche, portfolio manager at Citadel.
“As a result the majority of the SA producers are cash burning at current spot prices. Above-inflation wage increases, high electricity prices and a lack of investment in the industry over a number of years have all taken their toll on the miners.”
As price takers, SA platinum producers are beholden to the ruling market price, squeezed lower by the growing threat of low-cost supply from Russia and Zimbabwe. Other factors weighing on the price are the continued growth in recycled platinum group metals (PGM) supply, growth in the market share of electric cars over PGM-consuming diesel cars (the latter are big consumers of platinum, which is used in catalytic converters to reduce noxious emissions), and changes in consumer trends.
