Gold's Big Price Crash, 10 Year On
Friday, 7/07/2023 17:07
Happy anniversary to 2013 gold price crash...
WEIRD but true, writes Adrian Ash at BullionVault.
Sometimes – just sometimes – 'safe haven' gold can feel like anything but.
That might sound hard to believe here in mid-2023.
The precious metal, after all, has set
a run of new all-time highs so far this year, culminating with a new calendar-quarter record average gold price between April and June.
And longer term, since the turn of the Millennium for instance, gold remains the best performing major asset class bar none for Euro, UK, Japanese and many other investors...
...and its price has risen 2nd only to the fabled 'real-estate investment trust' for US citizens (8.99% annualized between 2000 and the end of 2022 vs. 9.02%).
So it might seem that the gold price never does anything other than go up.
But no. Not always. Sometimes the opposite.
Ten years ago last week, the price of gold finally found its floor in the great crash of 2013.
It's worth glancing back at today. If you can bear to peer through your fingers, that is, while hiding behind the sofa. Because priced in the Dollar, gold sank 30% across 2013.
But it squeezed nearly all of that plunge into the April-June quarter...
...losing 25.4% in 3 months on the London benchmark price...
...and it did almost half of that plunge in just 2 days,
knocking $1 trillion off the value of all the gold above-ground, including jewellery and central-bank holdings as well as private investment gold, in a little over a weekend.
The horror-show got started on Friday 12 April, when the spot-market price
broke below $1535 per Troy ounce. That had been the floor since gold's big top of summer 2011, a peak spurred by that year's US debt-ceiling-downgrade debacle, the fast-worsening Euro debt crisis, and the worst rioting across England in 200 years.
Gold then sank on Monday 15 April,
down through $1400, but with price action
way more volatile in Comex derivatives than in physical bullion. Because on top of investors wanting to sell out of gold, speculators could smell blood, chasing the price lower through leveraged bets on futures and options contracts.
The price of gold next bounced, sank, bounced lower, rinsed and repeated over the following days and weeks...
...until it finally found its floor at $1180 spot ($1190 London PM Fix) on Friday 28 June, the very same level where it then fell back to end December 2013 six months later.
Ugly doesn't begin to describe it.
So what drove the worst gold price drop in history outside of the metal getting crushed by 1980's double-digit inflation-killing US interest rates?
Proximate events included Swiss bank Credit Suisse (remember them?)
calling the 'end of the age of gold' after a decade of relentless gains in January 2013.
By February 2013 analysts and brokers started to say that
gold had 'fallen out of fashion' for traders (something which
investment bank analysts would repeat throughout the ensuing bear market).
US finance house Goldman Sachs then
advised clients to sell gold short in early April, betting it would drop in price.
Then, and most dramatically, Eurozone member
Cyprus was told on Thursday 11 April to sell gold out of its central-bank reserves, and use the cash to try cutting its debts, by its European Union and IMF creditors amid Nicosia's bankruptcy and banking bail-ins.
Cyprus never did sell any gold. But sentiment was (and is) everything...and news of a European central bank off-loading gold to try covering its debts rang out like a fire alarm in a crowded cinema.
Of course, some investors had already been quietly exiting
gold-backed ETF trust funds since the previous December, back when the giant GLD product had reached a new record size at the end of 2012.
That peak had seen the GLD swell almost 10% larger from its size when the gold price had topped in summer 2011. It also coincided with the peak of what we here at BullionVault had come to call
'quanticipation'...
...the 'anticipation of more QE' from US central bank the Federal Reserve.
But while
the Fed in December 2012 did raise its monthly money creation to a new (then) record of $85 billion as pundits and traders expected, it also said "That's your lot, the absolute max, forget about us increasing again. In fact, new QE is going to stop at the end of 2013."
So the only direction now was for US QE to start slowing. Which meant that hedge funds and other momentum traders who'd starting buying gold as a play on QE expanding forever suddenly found their logic to be the wrong side of the future...
...and
the quanticlimax for gold prices hit immediately on the Fed's December 2012 announcement, with the metal failing to rise in what was clearly a "worrying sign" for long-term precious metal bulls.
Those worries meant that, come end-March 2013, the GLD had already shrunk by 1/10th from its December 2012 peak size, while chatter grew about when the Fed would start 'tapering' its monthly QE bond purchases, an event which would surely lead in time to the end and then reversal of QE entirely. Right?
Same for interest rates. The cost of borrowing was already at zero, and so it couldn't go any lower. (Well, not until the European Central Bank followed Japan and the Swedish Riksbank in going negative in 2014.)
Nor could US rates stay at 0% forever, right? Especially not now (meaning back in spring 2013) when the Lehmans' phase of the global financial crisis had slipped almost 5 years into history.
Result? The bond market rushed to reverse its bets on QE and zero rates...
...selling US Treasury debt to try pricing in steep rises to interest rates, the kind of rises that would suggest at least some level of 'normalization' after all that cheap and free money was thrown at the financial sector to prevent it collapsing.
That meant rates needed to rise in real terms, over and above the outlook for inflation. And to get ahead of the Fed, that meant pushing up the yield on inflation-protected bonds by knocking down their price. The price of those inflation-linked bonds had, during the big bubble in central banks slashing interest rates below the pace of inflation, become joined at the hip with the price of gold, because gold also tends to do well when regular bonds and cash-in-the-bank pay you less than inflation, losing real value. And by the eve of the gold price crash, this relationship
had become a truism, but only in one direction so far: Real rates down, gold prices up.
Across the half-decade to March 2013, the yield on 10-year US TIPS showed a strongly negative correlation of -0.7 with Dollar gold prices. That yield then leapt by over 1.0 percentage point in the April-June quarter.
So all those hedge funds and other programmatic traders betting on gold (or against it) through the prism of real rates rushed to sell it short. Because in their philosophy, gold had become nothing but the opposite of real rates, and real rates were surging at a record pace.
Never mind that
the Fed's QE bond holdings actually grew across 2013, swelling by more than one-third and then growing by another 11% again across 2014, as the central bank stuck with the mega-pace of monthly QE it had first reached back at the end of 2012 to the disappointment of gold traders. Never mind either that after the shock of Q2 2013 was finished 10 years ago last week, gold's relationship with real rates then broke down...
...just in time for 10-year TIPS yields to ease back. So bullion failed to rally...
...and then it failed to rally yet again as the relationship then returned just in time for real rates to turn higher once more – driving gold lower yet again – until the bullion market found its ultimate post-financial-crisis floor the very day that the Federal Reserve finally started raising its key interest rate from 0% in December 2015, way down at $1045.
More on that number in a second. Let's start with spring 2013's lessons for today. Besides the need for blood-pressure tablets.
Firstly, no. Gold cannot go bust or get inflated away. And no, its price (almost certainly) can't go to zero. But very rarely it might feel like it, and spring 2013 was one of those times.
Secondly, any correlations and relationships across financial markets can and will come and go. So in 2022, that enabled gold to hold remarkably firm despite the US Fed hiking the hardest since Paul Volcker's inflation- (and gold-) killing rate hikes of 1980, plus the same 1.0 percentage leap in 10-year TIPS yields which had coincided with the Q2 2013 gold crash.
Thirdly then, context matters...
...and just as, say, Cyprus maybe selling some gold during a strong bull run for the precious metal probably wouldn't dent the bullion price (US Treasury sales didn't hurt in the late 1970s), so the interest-rate cycle which the world is now undergoing carries way more fear, uncertainty and doubt than 2013 did.
Take note: All this FUD hasn't simply helped to support gold prices through the Fed's current rate-raising campaign. On the contrary, gold has run to a series of new all-time highs...
...making a new annual average record in 2022, before rising to a new quarter-end high this March, setting a new month-average high across April, and then hitting a new intraday spot-market high in early May as the United States' mini banking crisis took down Swiss bank Credit Suisse, now swallowed by giant competitor UBS.
Indeed, gold prices across April-to-June 2023 just topped this stellar run of new all-time highs by
setting a fresh quarterly record average, way up at $1975 per Troy ounce (£1577 or €1814 per ounce, or ¥8688 per gram if you're trading in Japanese Yen).
Bottom line?
Like mega-QE and zero interest rates a decade ago, this run of new record highs in gold prices cannot last forever. Bad things can also happen to the bullion market when the world decides that the outlook for everything else is improving.
But for now, the factors that have so far helped gold beat the steepest rate hikes since the early 1980s remain unresolved...
...not least the record-heavy central bank gold buying of 2022, which so clearly helped the gold price shrug off the kryptonite of rising real rates. That demand should remind us that, 10 years ago, the gold market's eventual floor of $1045 per ounce – reached at the end of 2015 – had been predicted by some analysts and traders when the gold price crash began
in April 2013 and
again that October, based on the fact that $1045 was what the Reserve Bank of
India had paid for a big chunk of the precious metal a few years previously. Whereas today, central banks led by China have been buying at $2000 and above, suggesting that price maters less than ownership for the world's largest holder of national savings.
More widely, the underlying support for gold investment being spurred by geopolitics, strong inflation and financial uncertainty is now compounded by the risk of
Western central banks doing too much, too late to tackle the cost of living crisis, triggering a recession that will force them to start slashing rates instead.
Quite how gold will respond to that, who can guess? Meantime, let's give thanks this isn't 2013.
But let's remember that it can happen, all the same.
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