Over the recent days and weeks, the gold price has dropped sharply on global markets. While some experts believe it might be the end of the "golden decade," others believe the price will eventually pick up again.
As early as 2011, George Soros, a legend among the world's best-known speculators, called the meteoric recent rise in the price of gold "the ultimate bubble." At that point, the price had roughly tripled in less than five years. More recently, he warned gold would no longer be a safe haven for investors.
Should his warning have had a share in triggering the decline in the price of gold? The freefall started on April 11, 2013, and last Friday the gold stock dipped by some 5 percent. When the markets reopened on Monday, there was no holding back the decline anymore. The price for an ounce (31.3 grams) fell by more than 8 percent to $1,356 (1,040 euros), with a 15-percent drop recorded within just three trading days.
Half a year ago, an ounce would still sell for over $1,800. "After all, we've seen the biggest decline in 30 years," says NordLB analyst Norman Rudschuck. "Last Monday alone, some $770 billion in gold value went down the drain."
Disappointing China figures
Herd instinct will have played a certain role. "We're talking about self-intensifying forces which have unfolded one by one," Rudschuck told Deutsche Welle. He said the sellout could have been triggered by stop-loss orders.
But other factors are also certain to have sent gold markets panicking. Economic data from China have been worse than penciled in by analysts. In the first quarter of this year, China's economy expanded by "only" 7.7 percent, short of the 8 percent expected by market pundits.
"China is the world's second-biggest gold consumer, and the second-largest oil consumer to boot," said Rudschuck, adding that prices are bound to take a tumble, should its domestic economy falter.
Cyprus and Fed-related speculation
And then there's been speculation over the eurozone nations' gold reserves. ECB President Mario Draghi recently indicated that Cyprus could sell some of its reserves to beef up its own contribution to the bailout by international lenders.
Although Cyprus is hardly able to directly influence the gold price with the 14 tons in deposits it owns, investors fear other countries might at some stage follow suit and do the same.
Some analysts suspect the United States' monetary easing policies may soon come to a halt against the backdrop of more positive economic indicators from the US in recent weeks. This would mean that gold would become far less attractive as a shield against inflation. Moreover, rising corporate earnings result in rising stock values, prompting investors to focus more on shares again rather than on gold. To put a positive spin on it, the decline in the value of gold might herald a pick-up of the global economy.
Even though this might suggest that the "golden decade" is over, Norman Rudschuck thinks the sheer scope of the decline in the gold price is exaggerated, and he expects a slow trend reversal. "We believe that central banks wanting to buy gold, say, China and Russia, will seize the opportunity to do just that now that prices are down," Rudschuck argued. This would help their central bank sheets to become more independent from the US dollar.
While western European central banks hold 70 to 80 percent of their currency reserves in gold, it's only 2 percent in China and 10 percent in Russia, meaning there's still some catching up to do in the view of Rudschuck. He reckons with a gold value of $1,700 to $1,800 by the end of the year, approaching its previous all-time high.