Analysts at Goldman Sachs point out that the two "highest conviction" trades over the past five years - 'long gold' (on currency debasement) and 'short natural gas' (on rapid US shale expansion) - have now effectively reversed due to improving sentiment about the health of the US economy. Leaving aside the fact that this conjecture obviously reflects Goldman Sachs' existing market positions, if investors are now buying into a nascent US revival, we might well be justified in asking whether fear has simply given way to misplaced optimism.
On the face of it, any renewed faith in Uncle Sam certainly doesn't square with the recent performance of some key commodities, namely crude oil and copper, which had been steadily deteriorating even before gold's worst one-day fall since February 1983. But because of the domestic production surge now under way, trying to gauge activity within the wider US economy through reference to West Texas Intermediate (WTI) has become a fruitless exercise. The US is sitting on a stockpile of 390m barrels - the highest level since 1990 - so WTI prices are now structurally under pressure, whereas Europe's sickly status is aptly demonstrated by the fact that Brent Crude prices have moved back below the $100 level.
The current US quarterly earnings season has seen a number of companies fall short of expectations and forward copper prices are likely to provide a more meaningful insight into the underlying health of the US economy, particularly as construction on new US homes continued its nine-month trend by hitting its highest rate in almost five years last month.
Admittedly, the gold sell-off was, by all accounts, largely driven by hedge funds exiting ETF contracts, together with fears that the Cypriot government might be forced to offload its gold reserves to finance a portion of its bailout. At 13.9 tonnes, Cyprus's total reserves equate to just 0.3 per cent of annual global demand, but the fear is that larger troubled European countries such as Portugal, Spain, or even Italy could follow suit. The gold price also apparently breached two technical support levels, but whether - as some US analysts are predicting - it will plummet well below the $1,000 an oz (£649 an oz) mark is highly debatable, particularly when you consider that falling grades have pushed average cash costs across the industry to $727 an oz - and that's before you factor in processing, replacement capital expenditure and remedial costs - there's simply not as much headroom for producers any more. Indeed, some have argued that production is now uneconomic with a gold price below $1,200 an oz. Gold bugs will be looking for a price rebound come 13 May 2013 - the Akshaya Tritiya festival - which the world's 1bn or so Hindus see as a particularly auspicious date to buy gold.
