Wednesday, 19 October 2011

October 19 2011 gold ETF investor report: what's going on?

Yesterday (October 18 2011) the gold price fell and, subsequently my physical gold ETF (PHAU) shares closed down more than 2%? They've recovered a bit but what happened?

A story from Reuters said: "Gold fell for a second session on Tuesday as investors worried about slowing Chinese growth, a warning on France's credit rating and dimming prospects for a solution to the euro zone debt crisis."

To me these are all "known unknowns" - If one expert says one thing I believe it until another expert contradicts it - I have no evidence of my own.

But on Tuesday what I didn't understand was that all of these known unknowns were saying that everything looked bleak for the world economy. So why didn't gold, the investment of choice for fearful people like me, rise on this news?

Was it the same thing that happened last month when the gold price fell alongside share prices on stock exchanges around the world? That fall prompted me to buy my PHAU shares on 22 September. (Markets and gold fell further on Friday 23 September - the day I bought my units in the BlackRock Gold and General fund - and then fell a great deal more on Monday 26 September: here's a Google chart of the fall.)

What were the reasons given for the falls in September? There were some who said it was because the price of owning gold futures was raised (margins) by 21% on Wednesday 23: story in Forbes and Zerohedge. There was a different suggestion from CNN saying it was deflation fears. And then a lot of people were buying dollars (see chart below) as investors looked for a safe haven... but not gold.

I feel I need to understand why gold is moving in the same way as shares when, up until recently, it tended to move in the opposite direction. I also need to have view on whether this new relationship is likely to continue. Unfortunately I can only ask an expert and hope I get the right answer.

For now I'll go with some comments from the Reuters story which pointed to research from CitiFX (part of Citigroup) who said they expect gold to rise above $2,000 an ounce after a correction (the current falls) and eventually trade as high as $3,400.

It said "Gold has gone from being a protection against 'risk off' to a 'risk-off trade' in itself ... We still believe that this market nervousness has further to run in the coming weeks or months" (In other words people don't seem to buy gold to protect themselves anymore.)

The story also points to independent investor Dennis Gartman who plans to halve his gold positions, citing bearish technical signals and prospects of margin-call selling.

All this technical stuff... and I still can't get my head around what's supposed to happen in normal times.

When it is put up against the FTSE 100 over the last year it looks pretty clear that the physical gold ETF generally moves in the opposite direction of the stock market. When share prices rose gold fell and vice versa (click on these charts to enlarge - unless your eyes work properly)

I've included what I hope is a version of this dollar index - bascially the global value of the dollar. This is the value of the dollar against a basket of currencies - I could only find it dating back to April 2011 so that's where I've gone back to.

The relationship between PHAU and the FTSE seems to be changing. A look at their percentage changes appears to show some kind of a change - in September and October they move together more often.

But then there doesn't seem to be much of a change in the relationship between PHAU and the dollar index, other than gold getting a lot more volatile - but that's just from casting an eye over it. I'll have to do something a bit more scientific to find out for sure.

I don't think any of this is going to help me... but I've got to start somewhere.