Last week’s decline in gold (8.6%) was the biggest in percentage terms since 1980, but exactly what’s the story behind this precipitous decline? Last week the dollar index was up 2.5%, although we only have to go back to two weeks ago to see a greater increase of 3.3%, during which gold fell only 1.4%. In other words, it’s goes far beyond the observation that it was in response to the firmer dollar. The other interesting observation about the current decline of gold is the lack of reaction in gold holdings of gold ETF funds. These have been remarkably steady over recent weeks, with holdings actually increasing a touch (around 0.5%) at the same time that the gold price has fallen 15%. This suggests that retail investors are sticking with gold, or at least aren’t liquidating in great swathes and the decline has more to do with the bailing of long positions elsewhere amongst institutional investors. Furthermore, the CME has once again increased margins for a range of metals, gold included, in response to recent market volatility and this makes it more expensive for more short-term traders to take positions and also hedge.

Fundamentally though, the fact that gold is having such a torrid time when global real interest rates are near to zero is indicative of the extreme risk aversion that is currently being seen. But underneath there is the fear that policy-makers may not be able to engineer the inflation and or currency devaluations that underpin many of the bullish views of gold at this point in time. From this angle, a synchronised global downturn may struggle to support gold in the same way that was seen soon after September 2008 through 2009.

Source: www.fxpro.com