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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2640

Plummeting Gold Price: ultimate index of uncertainty

Hemantha Abeywardena writes from London…

Gold, which fell to a level as low as $1339 an ounce on Thursday, did recover some of its battered value by a few dollars by the weekend, while leaving millions of investors in the lurch before the chaotic fluctuations of its value on computer screens.

The price, which crashed to a two-year-low a few weeks ago, slightly picked up, perhaps, due to the anticipated high demand in the run up to Akshaya Tritiya on May 13, an auspicious day for a Hindu to buy the yellow metal in the hope of being blessed with good luck

The steep fall in value by the weekend shows that volatility has started haunting the markets again, leaving hoards of investors, companies and even banks rudderless while adding yet another disturbing dimension to the domain of financial market uncertainty. When the drop in price records the biggest two-day fall in thirty years, it is no longer trivial; nor is it just one-off.

Those who bought gold in November, 2012, for instance, suddenly find the losses almost amount to 20% or nearly $400. It is a bolt from the blue for the investors who embraced the yellow metal as a safe bet in the aftermath of the financial crisis.

Everyone is wondering what is going on; the trend clearly defies the prevailing market wisdom: price seems to be inversely proportional to high demand – the greater the demand, the lower the price!

Apart from pointing a partially-stiff finger at the obvious – selling of gold by traders – we are collectively clueless as never before behind the causes of the fate of the precious metal.

At present, the speculators are singled out for the blame game. Of course, they are not saints. If we go that way too far, however, it is tantamount to barking up the wrong tree. The circumstances are as complex as the charts and indices that decide the gold price in short time intervals.

Conspiracy theorists, meanwhile, are preparing a case against a well-known American investment bank for triggering off gold’s tumble by forecasting a bearish market for gold in 2013. They feel that the bank in question should not have forecast what it had said before the crash and see a sinister motive in it.

If the unexpected – and continuing - fall is a part of a determined manipulation, it is something that has to be nipped in the bud. There are already signs that small businesses, pawn brokers, jewelers and even banks, which have been hoarding gold at an accelerated pace, are staring into the precipice of uncertainty. If the price fell a bit more sharply, it would have rattled the banking sector, especially in the emerging economies, to its very core on a very nasty destructive note.

A senior executive of a Sri Lankan bank told me this week how anxious they are right now, as they have substantial gold reserves. He said to me how the senior bankers held their breath, when the price fell quite unexpectedly, while making mockery of model-based heavily-optimistic forecasts, a month ago.

Gold is not the only commodity that sees price falling. Silver, copper and even oil are experiencing the same doom, but not as worryingly obvious as what is happening in the gold market.

The sharp fall in price this week has hit hard the investors who had been hypnotized by the familiar mantra during a price drop of this kind: “unpredictable price drop is an opportunity to buy.” Much to their dismay, they know that it is not only an opportunity to buy, but also an opportunity to fret and fume - in the worst case scenario, to put a curse on the house of financial advisers.

One factor, often overlooked by economists in the face of strange developments such as gold crash, is the effect of so-called Quantitative Easing, QE, simply known as money-printing. As it rises to unprecedented heights in the developed world, the relevance of all existing famous economic indices seem to be slowly moving into oblivion - in a mathematically measureable way.

The economic uncertainties, ranging from commodity crises to credit troubles, reflects the emergence of new fault lines underneath the existing financial system owing to QE. They may not be visible to the trained eyes of the economists, who are just products of the very system themselves.

The unpredictable – and in many ways, unprecedented – fall of gold price indicate that seismic activities are at work along the new financial fault lines without the corresponding outward indications to warn about them.

We don’t have to look any further than the fate of a precious commodity, which has been maintaining both its value and mythical status for centuries, to catch a glimpse of the new danger.

So, gold lovers may feel a bit emotional by noting the fact that their precious metal is ultimately becoming a callous platform for erecting a new economic index – the index of uncertainty.

- Asian Tribune -

Plummeting Gold Price: ultimate index of uncertainty
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