The FINANCIAL — London-26 September 2011: The recent falls in the price of gold are primarily the result of the commodity being overbought says Fitch Ratings.
While a number of factors are likely to have contributed to the recent falls, these are secondary considerations compared to what Fitch sees as this fundamental overpricing. Gold has fallen by almost 15% from its peak of USD1,900/oz on 5 September 2011to USD 1,620/0z today.
"Gold price increases over the past two to three years have largely been driven by macroeconomic concerns and the metal's status as a store of value, and have become detached from fundamental supply and demand considerations," says Peter Archbold, head of Metals and Mining in Fitch Ratings EMEA corporate group. "While market concerns over the macroeconomic and sovereign outlook have not eased at present, recent moves may reflect investors' concerns about buying into gold at such historically elevated levels." Archbold added.
Other factors may have contributed to this apparent change in investor sentiment. These include increased margin requirements at the Chicago Mercantile Exchange, and the strengthening US dollar. Fitch believes that the emergence of physical Exchange Traded Funds in gold are likely to have made the market more reactive to investor sentiment, making rapid moves more likely.
"The gold selloff in the last week represents a significant change in pattern of the risk-on/risk-off trade," says Alex Griffiths, Senior Director in Fitch's Credit Market Commentary team. "The trade has until recently seen rising perceptions of risk in the global economy accompanied by a flow into perceived 'safe assets' such as gold and US Treasuries. Investors' attitude to gold now appears to be shifting."
Even at reduced prices, gold producers continue to display profitability levels which are high by historical standards. At USD1600/oz, for example, Fitch estimates gross margins in the region of 50% plus.
Discussion about this post