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Given the challenges it faces, gold so far in 2012 has
in fact proven strong...
"Gold Price Plummets" is the obvious headline right now. But fact is, the gold
price has in truth been surprisingly strong so far this year.
First up, the US gold futures and
options market. These contracts rarely run to physical settlement, but still
they wag the dog of physical prices near-term. Because the price of gold for
future delivery of course affects how much people ask or bid for metal today.
That future price, whether being set by hedge funds or
chased by doctors and dentists (private traders risk getting "filled and
drilled" by retail brokers, or so goes the joke), is bet on with
borrowed money. So credit is a big factor. And credit has vanished since last
summer's big peak in the gold price, just as did when Lehmans
collapsed.
 
Next up, the world's heaviest physical buyers - Indian
households. Now overtaken by Chinese consumers, India buyers are always quiet
this time of year (what with the monsoon season, a lack of auspicious
festivals, and the post-harvest wedding and Diwali season still four months
off). But New Delhi's active policy of trying to stem gold bullion imports
in 2012, plus the record-high prices set by the fast-sinking Rupee, have
chewed up this massive support for global demand by perhaps 30% or
more on best estimates.
That's had a big impact on the wholesale physical
market - still centered in London, more than 80 years after Britain abandoned
its Gold Standard. Physical investment demand from the big institutions has
clearly eased off as well.
Here's what the market-making bullion banks say they're
turning over each day on average between themselves. You can size it up by 5
times or more to get the true market-wide volume.
As you can see, London's volume by value has sunk
one-third by value since last summer's peak. Yet the gold price has lost only
11% on its monthly average.
Now, perhaps that gap will be closed. Some speculative
traders in the futures and options market certainly think so - and they think
the gap will be closed by prices falling still further, as well.
See the red line in our first chart above. Speculative
traders haven't held this big a short position in gold since the price was
down at $400 or so. But given these factors all weighing on price,
"plunging gold" in fact looks pretty hardy. Existing sellers are
refusing to slash their offers, and new buyers are still paying historically
strong prices to acquire metal today.
Lucky for them, gold's unique mix of inflation and
default insurance is currently cheaper than its peak price of 12 months ago.
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