(Story updated to reflect gold's gains on Thursday.)
Year-to-date gold prices have dropped enough this week to almost be in the red for the year, as fears of the eurozone falling apart gripped investors and led them to turn their backs on gold as a safe haven—partly because they were bidding up the dollar.
The SPDR Gold Shares (GLD - News), the $63.87 billion physical bullion ETF, closed Thursday at $152.80 a share, just 0.5 percent higher than at the end of last year, according to data on Google Finance. Prices briefly dipped into the red after Wednesday's session.
Spot gold prices were at $1,543.50 a troy ounce Wednesday morning, their lowest since late December. But gold appeared to bounce off technical support on Thursday, and spot prices were at $1,573.80 an ounce at the end of the day. Gold has been sliding—upward of 5 percent in the past month—even as legendary hedge fund manager George Soros said in a regulatory filing on May 15 that he tripled his GLD holdings in the first quarter, Bloomberg News reported.
Gold is behaving very differently than it did last summer around the time of S'P’s downgrade of U.S. debt. Gold rose at the time to a record of around $1,900 an ounce, before the price began to crater due largely to redemptions by banks and hedge funds seeking to cover positions as worries turned to the debt-laden eurozone.
The strengthening of the dollar is a big reason gold prices are sliding, though ETF holdings are relatively stable, meaning much of the price action is being driven by the gold futures market. Gold is priced in U.S. dollars.
“‘If the price of gold is unchanged, but the dollar appreciates, gold will then likely trade lower,” said Timothy Harvey, a senior vice president at ETF Securities, an ETF firm that specializes in precious metals.
Harvey said about 400,000 ounces has been redeemed globally in the past week and that this amount represents less than half a percent of the gold held in ETF structures globally, hardly enough to affect prices significantly.
Sell-off Could Turn Sharper
If Greece does get kicked out of the eurozone—a possibility some observers have dubbed a “Grexit”—and the contagion spreads to Spain or Italy, gold could fall even further.
Such a sell-off would be the result of European banks selling gold to raise cash and as investors are increasingly seeking the security of the U.S. dollar.
Other gold bullion ETFs besides GLD, such as the $8.83 billion iShares Gold Trust (IAU - News) and the $1.69 billion ETFS Physical Swiss Gold Trust (SGOL - News) are down about 7 percent in the past month and 1.5 percent this year.
Gold miner ETFs have been hit even harder. The $7.2 billion Market Vectors Gold Miners ETF (GDX - News), the biggest among them, has fallen 15 percent in the past month, more than 22 percent this year and almost 27 percent in the past year.
Gold Still Strong
A potential wild card with gold prices could be quantitative easing in China, which is projected to pump $65 billion into the Chinese economy.
“Theoretically that should be good for gold,” Harvey said, adding, however, that any significant gold rally is predicated on the dollar weakening.
Despite gold’s shortfalls over the last year, the performance of the precious metal, which has risen almost 500 percent in the last decade, shouldn’t be forgotten.
“Gold is by no means over,” Harvey said, “Gold has been viewed as a monetary store of value and wealth for millennia, and fundamentally nothing has changed.”
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