In the third quarter (Q3) of 2012 gold had two distinctly different halves. At times in July and early August, gold fell below $1,600 and sentiment was weak, but other times, bullish sentiment was high, largely driven by the anticipation of monetary programs from central banks.
The announcement of Outright Monetary Transactions and a third round of quantitative easing (QE3) in September did not disappoint. September gold prices in London had an average price of $1,734. The metal ended Q3 with gains of about 13 percent and an average quarterly price of $1,654.
In July and early August, market participants yearned for action from central banks, but could not get a clear indication if or when it would be forthcoming. European Central Bank President Mario Draghi stoked anticipation when he vowed to do “whatever it takes” to save the euro, but then disappointed the market when action did not immediately follow.
US data, including employment figures, often beat expectations and created similar uncertainty.
In mid-August, gold began to rally as market participants started betting that monetary policy was imminent. Conditions in the Eurozone appeared to increasingly warrant intervention and the release of the minutes from a previous Federal Open Market Committee meeting indicated that US central bankers were leaning toward further easing.
Speculative bets in the futures market grew. For COMEX gold, the net-long fund position was at a low of 112,977 contracts in July. A report from Scotiabank reveals a steady climb to 158,491 contracts by the end of August and a further increase to 203,896 contracts in September.
Gold retained its title as the preferred commodity among ETF investors. $7.7 billion flowed into gold ETPs during the quarter, according to quarterly data released by ETF Securities. Of the $31 billion increase in commodities, gold accounted for $23 billion with the inclusion of price increases, bringing total gold assets to $151 billion, an all-time high.
ETF investors provide a prime example of the shift that occurred in the gold market.
In July, ETF investments in Europe declined compared to June, but inflows still hit $874 million. In North America, investors were readily selling in July; over $1.2 billion flowed out of ETFs, causing negative net flows for the month.
There was a significant growth in appetite in both regions in August. That continued in September, when the strongest inflows of the year occurred, over $4.3 billion. During those two months, North American purchases were nearly double those in Europe.
Why was North America selling gold when Europe was buying only to emerge with an outsized appetite for the metal?
“The further away investors are from an event, the more the distance clouds their judgment” said Martin Arnold, a researcher at ETF Securities. He explained that the firm tends to observe different behavior among North American and European investors based upon where market-relevant news is occurring.
As QE3 was the more significant driver for gold prices, North American investors appeared to be the stronger supporters of gold. In North American markets an added boost was provided by avid retail investment, which Europe continues to lack. Arnold said institutional investors are still the mainstay in that region.
The positive sentiment also extended to coin investors. American Eagle sales at the US Mint jumped 76 percent last month to 68,500 ounces, the largest increase since January, according to Bloomberg.
Gold miners, who have long been underappreciated, should not be forgotten. They rallied along with the other gold plays. There was such a shift in sentiment that gold mining equities actually outperformed metal prices. The FTSE Gold Mines Index was up 13.25 percent and the NYSE Arca Gold Miners Index rose 12 percent just in September, states a market note from US Global Investors.
Gold appears to have enough support to maintain current price levels, but currently lacks the force for a significant breakout to the upside. The metal has been facing resistance around the $1,800 level and these conditions may continue in the short term.
“It’s clear that the buying momentum evident last month has undoubtedly slowed down — both Friday’s reaction and recovery post jobs report highlighted the sellers lack of conviction while buyers are prepared to step in during pull-backs. This doesn’t help gold break $1,800, but for sure it highlights there is little conviction to get out, even if the data isn’t supportive,” said UBS.
Nicholas Brooks, head of research and investment strategies at ETF Securities, explained during a conference call on Monday that Spain is also creating a headwind for gold.
“As long as Spain holds out on asking for a bailout, that’s going to put pressure on the euro and lift the U.S. dollar. That’s not good for gold,” he said.
Brooks expressed belief that Spain will ask for the bailout. When that happens he expects people to be more positive on the euro and anticipates that gold may have a big rally.
Gold remains in bull territory, but some market participants are warning that there may be a correction ahead. However, if that occurs, the metal is expected to bounce back and continue rising. Pullbacks are considered buy opportunities by many market participants, such as Standard Bank.
The firm said gold could average $1,850 in Q4 and may even move to $1,900.
Much of the bullishness on gold is based on expectations that currency holders will react to the risk of monetary debasement. In addition to the European Union and US, other nations, such as Japan, China and Australia, have recently taken measures to bolster economic conditions. Overall, investors and central banks are expected to conclude that there are few options safer than gold.
“There will no doubt be corrections along the way,” said Scotiabank, which is bullish on gold. “Down the road, once the tools to fix the financial crisis have been found, when QE is being pulled-in and inflation is contained, then the bull market in gold may end — but such a set-up seems a long way off from where we stand now.”
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.