It has been quite a week with investors needing to digest the slump in gold prices and also the weakening of commodity prices as well. Although I have been warning about both a gold and commodities bubble for some time, I have to admit I didn’t expect the gold price to fall back quite this much, this early.
Having said that, I have stated on many occasions that the high gold price worried me because once the selling started it could turn out to be a rush for the exit. The gold bulls will pull out some of the usual stories about gold demand from India to try and calm themselves, but the reality is that if investors keep pulling funds out of gold ETF’s and central banks offload gold as well, then gold prices will keep falling.
As I wrote at the start of the year, I expect gold to finish the 2013 closer to $1000 USD an ounce than $2000 and at current exchange rates, the same could be said for gold in AUD terms as well.
In any case, Gold in AUD terms has been moving downwards for months as we can see reflected in the chart of ASX listed GOLD below.
Exchange Traded Fund (ETF) GOLD – 6 month chart
Even before the recent sell-off, ETF:GOLD had fallen from over $160 to around $145. Some of this decline is related to the AUD/USD exchange rate and some due to investors moving to higher yielding assets, but over the last few days the price falls have been fairly savage.
I am not going to attempt to make a short term call regarding gold – the market is just too volatile for that – but rather I will simply stick to my long term forecast for the gold price as mentioned above.
Of course as gold prices have fallen, so have stocks in the gold miners.
Newcrest Mining Ltd (ASX:NCM) 6 month stock price chart
Newcrest Mining shares for example have been on the slide for some months. In addition they have been sold off not only due to the fall in gold prices but also because of lower output from their gold mining operations. (this hit the share price in late March/early April)
But it isn’t just gold prices that are falling. Copper, iron ore, aluminium & even silver have all been caught up in a fairly broad-based fall in commodities prices. As a result mining stocks have also been falling for a few weeks.
Rio Tinto, Fortescue Metals & BHP Billiton – stock price movement
Miners like Rio Tinto (ASX:RIO) Fortescue Metals Group (ASX:FMG) and BHP Billiton (ASX:BHP) rallied last year as once again the market appeared to over-react to even a hint of good news.
No matter how many warning signs there are indicating that the Chinese economy is facing a lot of challenges, it seems the markets are willing to ignore them all on the back of a snippet of questionable official data. This pattern of behaviour all but guarantees some bumpy times ahead for mining related stocks.
Overall the wider Australian stock market has held up fairly well thanks largely to the banking and finance shares plus stand-out stocks like Telstra. But as I said some weeks ago, the market would fall once it breached 5000 (as it has many times before) and that is what has happened.
S&P/ASX 200 Index (XJO) 6 month candlestick chart
Finally let me sneak in a chart of the Baltic Dry Index
Baltic Dry Index 5 year price chart
The Baltic Dry Index like all economic indicators, has its weaknesses and shortcomings, but around 90% of global trade by volume is carried by sea so it is well worth watching the BDI as I have stressed on more than a few occasions.
At the moment the BDI is below its long term average and way below levels seen just before the GFC. As long as it remains below 1500 I will remain wary of commodities and mining stocks plus treat any talk of a sustained global economic recovery as wishful thinking by the IMF, Reserve Bank of Australia and confused economists.