At the beginning of this week the gold price hit its lowest level in over five years as Asian traders marked down the metal on talk of a likely US rate rise in the autumn. There were reports of a notional $2.7bn exit in Asian futures markets, but traders were left wondering who offloaded the position. It's worth remembering that, aside from gold, a broad range of commodities are also under the pump. And as most commodity funds carry a gold component, as investors exit commodities, they could be exiting gold positions unintentionally.
But the main narrative centres on gold's weakness - or increasing irrelevance - as the US recovery gathers momentum. This gives rise to further speculation that a rate hike is in the offing before the year-end. Never mind that the Federal Reserve has been fly-fishing with this notion since midway through last year. Why go to the bother of raising rates and risk stifling growth when you can simply float the idea from time to time?
In March of this year, St Louis Federal Reserve President James Bullard warned that markets could eventually react violently - a la the 2013 'taper tantrum' - if there was a mismatch between the market's and the Central Bank's expectations on the trajectory of the Fed funds rate. For now, Federal Reserve chair, Janet Yellen, is content to make the appropriate noises about "labour market conditions" and "normalising" monetary policy. But it's worth remembering that the Fed Funds rate underpins the real interest payment on a 10-year US Treasury note. So, by prevaricating on a rate hike, the Fed is helping to trim the interest costs paid by central government - and, by extension, US taxpayers. That's a stimulus measure we rarely read about.
US monetary policy aside, we're all aware of the inverse correlation that exists between commodities and the US dollar. But what are we to make of the fall-away in gold prices when we were recently faced with a looming Greek debt default? With Greece apparently on the verge of leaving the currency union, confidence in an already faltering euro would have been further eroded; perhaps fatally, according to some pundits. You would think that this would have provided ideal conditions for a breakout of the gold price. Instead, it actually pulled back in the face of the crisis. Does this latest episode indicate that gold's status as a safe haven should be relegated to a footnote in the history books?
Rather than drawing any inference from gold's desultory performance, the latest chapter in the Greek tragedy could suggest that outside the ECB there's waning appetite for euro-denominated debt, which has the effect of pushing the dollar higher - and commodities lower. With the benefit of hindsight, we can assume that investors weren't overly concerned that a Greek default would spur a full-blown financial crisis. But if the eleventh hour fudge hadn't been achieved, the dollar/euro rate would have nudged even closer to parity.
And it's plain enough why the currencies are coalescing. The eurozone - like the US - has seen the transfer of private debt to banks; from banks to the executive; and from the executive to central banks. But unlike the US, many member states within the eurozone continue to plod along with moribund growth rates. It's just possible that the single currency (not just Greece) is perceived as a busted flush in its current form - a point borne out by recent comments from the International Monetary Fund (IMF).
With ever more capital propping up dollar value, it's perhaps ironic that China's decision to publish its official gold holdings for the first time in six years is being linked to its desire to have the yuan accepted by the IMF as a reserve currency; a distinction currently held by the dollar, the euro, sterling and the Japanese yen. The G7 nations have reportedly given qualified backing to the yuan's ascension, particularly in light of recent structural reforms implemented by Beijing.
According to state statistics, China's gold reserves increased by 57 per cent since 2009 to 1,658 tonnes - about a fifth those of the US. The figure, which was about half the consensus estimate, has been treated with scepticism by industry analysts. Why would officials in Beijing wilfully understate their reserves at a time when they're pressing for the yuan's inclusion in the reserve basket? One possible explanation is that they're actually reluctant to undermine confidence in the greenback. Not only is the health of China's export market intimately tied to dollar strength, but the People's Republic still has massive US dollar exposure.
