The price of gold is down — way down. It’s fallen more than 20% from its 2011 high. Last Friday saw the biggest two-day fall since 1983.

But the price of gold has always been disproportionately speculative; most economists see little reason for concern. Certainly there is a strong case for investor caution, but panic might be premature.

For the past decade, investors have seen the metal as a safe haven amidst stormy financial markets. By September 2011, the gold price had reached US$1,920 an ounce. Now, it trades at $1,381 an ounce. But similar numbers were seen in 2011, before a sharp increase in the price.

Average price of gold per ounce (USD)

The price fall is probably just a correction, according to Chris Caton, chief economist at BT Australia. He says it was overbought before, and prices had been too high. But he points out rumours that Cyprus will sell its gold to help finance a bank bailout had rattled the market and started sell-offs. Caton doesn’t think there will be wider economic implications. But prices won’t return to record levels in the near future.

Economist Steve Keen, formerly of the University of Western Sydney, says the pertinent question is not why the gold price fell, but why it got so high in the first place. He blames “gold bugs” — investors enamoured by gold and often wary of fiat currency — for the increase.

“Gold is a speculative commodity that does well during financial crises,” he said. “A receding of that fear as America’s economy stabilises will drive down prices.”

Now we’ll see a “long squeeze”, he said. This is when speculators, expecting gold prices to increase, buy the commodity with borrowed money. Once the price begins to fall, they are forced to sell, dramatically accelerating a fall in price. And Keen believes continued weakness in American and European markets will see more fluctuation in the gold price. Good news will cause prices to fall; bad news will see the reverse.

But Keen believes there will be a wider impact, especially in the resource sector, where a lower gold price will affect Australian gold producers. Australia is a major gold exporter, and there has already been a $15 billion drop in the value of gold miners. While some miners have production costs of around $1,200 an ounce, costs can be much higher. Mooted expansion plans at several West Australian mines may be uneconomical if prices remain low.

And perhaps things are turning around. Reuters reported a lift in prices yesterday as investors sniffed around for bargains. Down, down, but maybe not for long?

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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