Gold’s ‘flash crash’: what the experts think

Bad/good news

“Much can be gauged by the relationship between stocks (which gain on optimism) and gold (which gains on pessimism),” said John Authers on Bloomberg. A rising gold price signals concerns about currency debasement and inflation; “it’s a hedge against central banks losing control”. So what should we make of this week’s gold “flash crash”, in which the precious metal lost 4% of its value in a single session during Asian hours on Monday, before recovering by almost 2% to $1,730 per oz? Bad news for goldbugs would seem to indicate better news for the rest of us.

Gold, oil and the dollar

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The sharp fall was certainly in line with the overall trend, said Neil Hume and Henry Sanderson in the FT. “Traditionally considered a haven metal”, gold is down 8% this year – mainly on account of rising bond yields and a stronger dollar, which “dampens the appeal” of holding it. The strong US greenback is also causing ructions in other markets, notably oil, because it “makes crude more expensive for holders of other currencies”. The price of Brent, which suffered steep losses last week, fell by more than 4% to $65.33 a barrel on Monday – though much of the decline was down to “growing concerns” about the Delta virus variant “sapping demand in Asia”; it doesn’t help that the world’s biggest importer, China, “is currently fighting its worst Covid outbreak since the start of the pandemic”.

Loss of faith

“Gold’s swift drop to the lowest since March” was “exaggerated” by technical factors, and the “poor liquidity” that often affects markets in August, said Bloomberg. But the trigger was the release of a set of “strong US jobs data” indicating that “the world’s largest economy is well on its way to recovery”. If that prompts the US Fed to become more “hawkish”, it “could spell the start of a definitely bearish market for bullion”. Investors in gold exchange-traded funds (ETFs) are already voting with their feet. Having driven the gold price “to a record last year”, they’ve cut their holdings significantly. Given the widespread loss of faith, “it’s hard… to be bullish for gold at the moment”, said Marcus Garvey, head of metals strategy at Macquarie. Only the brave will buy the dip.