March 23, 2023

DealBook: Price of Gold Takes a Flashy Fall; Other Markets Follow

9:02 p.m. | Updated

Gold prices tumbled 9 percent on Monday, the sharpest drop in 30 years, heightening fears that investors’ faith in the safe haven has been shattered.

The steep fall in gold, after a slump on Friday, led a broader sell-off in commodities and stock markets. The Standard Poor’s 500-stock index declined 2.3 percent — its sharpest one-day decline since early November. Crude oil prices fell to under $90 a barrel, and copper dropped to a 17-month low.

The catalyst was disappointment over Chinese growth, which has been a bright spot in a global economy marred by uneven recoveries and Europe’s persistent debt problems.

A report on Monday showed that Chinese economic growth unexpectedly slowed to an annual pace of 7.7 percent in the first months of the year, from 7.9 percent at the end of 2012, suggesting that China’s demand for industrial materials would soften.

Weak regional manufacturing data in the United States also weighed on the United States stock market, as did the explosions in Boston later in the day.


Still it was gold that took the market spotlight on Monday.

The price of the metal has been undergoing an extraordinary reversal from a decade-long rally. Since reaching a high of $1,888 an ounce in August 2011, gold has been on a downward slope. The decline picked up pace on Friday, when gold fell 4 percent, officially taking it into a bear market, which is defined as a 20 percent drop from its recent high.

The damage worsened on Monday, when the price of an ounce of gold dropped 9.35 percent, or $140.40, to $1,360.60 for the April contract — the sharpest such one-day decline since February of 1983.

A number of banks, including Goldman Sachs, have recently lowered their forecasts for gold. But the recent drop has been greater than even the most pessimistic predictions.

“We’ve traded gold for nearly four decades and we’ve never … ever… EVER… seen anything like what we’ve witnessed in the past two trading sessions,” Dennis Gartman, a closely followed gold investor, wrote to clients on Monday.

The shift in gold’s fortunes presents a moment of reckoning for many so-called gold bugs, who had expected their financial lodestar to continue moving up in response to the Federal Reserve’s effort to stimulate the economy through bond-buying programs.

The assumption among gold bugs was that the flood of new money would cause inflation, making hard assets like gold more attractive. So far, though, there have been few signs of inflation taking root even as central banks in Japan and Europe have begun their own aggressive bond-buying programs.

“Gold has had all the reason in the world to be moving higher — but it hasn’t been able to do it,” said Matt Zeman, a metals trader at Kingsview Financial. “The situation has not deteriorated the way that a lot of people thought it could.”

The recent drop in gold prices has been partly attributed to signals from powerful members of the Fed that the central bank may begin to wind down its bond-buying programs. But the list of reasons to sell gold grows longer by the day. European politicians have indicated that Cyprus may need to sell off some of its gold holdings to pay for its bank bailout, which could lead other countries to do the same.

The market decline, like the decade-long run-up, has also been attributed to the new financial instruments that have made buying gold easier for a wide array of investors. The most prominent products are gold exchange-traded funds, which can be traded on stock exchanges, and which together hold as much gold as all but a few of the world’s largest central banks.

Hedge funds have used gold E.T.F.’s to gain exposure to the precious metal, but have been selling them off en masse in recent weeks. The largest such exchange-traded fund, with the ticker symbol GLD, had its most active day ever on Monday.

“The exits are only so wide and there are too many people trying to leave all of the sudden,” said Bart Melek, a commodity strategist at TD Securities.

Many gold analysts have said that the demand for physical gold is stronger than the demand for financial products linked to gold, like exchange-traded funds and futures contracts. But this has not been enough to prop up the market.

On Monday, the most obvious catalyst for the carnage was the disappointing Chinese economic data that led to talk that China will no longer need the same physical resources to expand.

In the commodities world, this did not hurt only gold. Silver dropped over 12 percent, platinum 5.6 percent and the benchmark oil contract was down 3.9 percent. Stock indexes fell 1.5 percent in Japan and 0.6 percent in England.

The S. P. 500 dropped 2.3 percent, or 36.49 points, to 1,552.36 on Monday. The Dow Jones industrial average closed down 1.8 percent, or 265.86 points, at 14,599.20. The Nasdaq composite index fell 2.4 percent, or 78.46 points, to 3,216.49.

In the bond market, interest rates fell as investors shifted their money to less risky assets. The price of the Treasury’s 10-year note rose 9/32, to 10226/32, while its yield dropped to 1.69 percent, from 1.72 percent late Friday.

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DealBook Column: One Wall Street Seer Says the Greek Tragedy Is Near

The markets had a tepid response to Greece's pivotal election.Simela Pantzartzi/European Pressphoto AgencyThe markets had a tepid response to Greece’s pivotal election.

If you want to be scared, truly terrified, listen to Mark J. Grant. He might be right.

For the last two years, Mr. Grant, a managing director based in Florida at a regional investment bank, has been predicting the bankruptcy of Greece and a cascade of chaos across the global economy, attracting quite a following on Wall Street in the process.

“Greece will be forced to return to the drachma and devalue, and the default will cause bank runs and money flowing into Germany and the United States as the only viable safe haven bets,” he declared the day before Sunday’s Greek elections, irrespective of which party would win. “Greece will default because there is no other choice regardless of anyone’s politics.”

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He then walked through the falling dominoes: “It will hit the (European Central Bank), the banks on the other side of the derivatives contracts, all of the Greek banks who are really in default at present and being carried by Europe as well as the nation, and the Greek default will spread the infection in many places that we cannot imagine because so much is hidden and tucked away in the European financial system.”

Welcome to Doomsday, brought to you by Mr. Grant. He says he doesn’t think of it as such; he calls it “reality.” He told me on Monday, almost hopelessly, “There’s only so much money to go around.”

In a Jan. 13, 2010, report, Mr. Grant forecast that Greece would default on its government debts, one of the first to publish such a prognostication.

Mr. Grant could be the Nouriel Roubini (Dr. Doom) of the European crisis. Mr. Roubini, the New York University economist, said the subprime-debt sky was falling for a long time before it fell. Few people listened, in part, because nobody had ever heard of him. Then, of course, the sky fell. Now everybody has heard of him. Time will tell, but soon everybody could know Mr. Grant.

The January 2010 report, written two years before Greece did indeed default, has made him the go-to forecaster of Europe’s collapse for some of the world’s largest investors. Nicknamed the Wizard, Mr. Grant, who works for Southwest Securities, sends out a daily report, often frightening in its detail and matter-of-factness, by e-mail to a who’s who of the world’s biggest institutions, hedge funds and sovereign wealth funds. Subscribers like Bill Gross, a founder of Pimco, the world’s largest bond fund, pay thousands of dollars a year to receive Mr. Grant’s views in their in-boxes.

Never one to sugarcoat his views, his success is partly a function of his plain-spoken way of making complex ideas simple.

“There is only one way out of this mess and that is if Europe keeps handing Greece money like one does to some aged aunt that cannot support herself, but that is a family decision,” he wrote. But, he argues, “Greece requires 16 other family members to support her jointly and the politics in many of these nations, including Germany, is making it difficult for the charade to continue.”

His view of European officials’ effort to “fire-wall” the problem countries is equally simple: “This whole subject is a ruse in my opinion. Think of horses in a corral. The rancher keeps trying to build a higher and higher fence around his horses but for what purpose? For the rancher it is to keep the wolves out.”

Mr. Grant, who loves to mix metaphors, takes his rancher metaphor further: “The real problem is that the horses are sick, infected and that the disease of fiscal mismanagement has spread to virtually every horse in the corral except one and do not expect that one, Germany, to remain disease-free much longer.”

Layering on another metaphor, he adds: “You can call cancer a cold if you like but it changes nothing; not one thing.”

Sadly, Mr. Grant is not predicting the default of just Greece, he’s already on to Spain (he reached that conclusion before many others, too).

“The country cannot afford to pay off their regional debt, their bank debt,” he wrote on Monday, “and various schemes to avoid the Men in Black from taking over will not work nor will the pleas for ‘more Europe’ as the words mouthed by Germany are meant for placation only and will not find implementation in any kind of timeline that will make any difference.”

He has convinced himself that Germany, the only country in a position to help, will not come to the rescue. “You can bank on one thing if nothing else; the Germans will not allow their cost of funding to rise or their standard of living to decline to help the nations that have gotten themselves in trouble. You can count on this!” he wrote.

As we were talking on Monday, he said he wanted to make clear that he did not believe Armageddon was upon us. And it’s not as if Mr. Grant is wishing this to happen, despite his boat in Fort Lauderdale, named “Wishes Granted.”

“I don’t think the world is going to hell,” he said. “It’s very negative. What’s going on is serious. It will have a whole slew of negative consequences.” But he insisted, “I don’t think it’s going to get to the 1930s.”

More likely, he said, we are headed for a bad recession with lots “of shocks to the system.” He says this will likely happen in the next four months unless “there is debt forgiveness or Europe keeps handing them money like they are a ward of the state.”

“Or,” he warned, “it could come sooner.”

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Swiss Central Bank Considers a Peg to the Euro

PARIS— Switzerland’s central bank signaled Thursday it was prepared to consider a once-unthinkable step: pegging the nation’s “massively overvalued” currency to the euro, at least temporarily.

Such a move would be a response to the global financial turmoil that has lifted the value of the Swiss franc, which investors consider a safe haven, to levels that are menacing Switzerland’s economy.

The bank could consider “So long as they are compatible with price stability long-term, temporary measures that influence the exchange rate are within our mandatea temporary link with the euro, as long as the measure is compatible with price stability over the long term,” Thomas Jordan, the vice chairman of the Swiss National Bank, said in an interview published Thursday in Bund, a Swiss newspaper.

“Nothing is excluded,” Jean-Pierre Danthine, a member of the central bank’s governing board, added in a separate interview carried in Le Temps, a Swiss daily.

Linking the franc to the euro could not happen overnight, and would face steep legal and political hurdles. But whether the comments reflected a true intent or were meant mainly to sway currency traders, the remarks helped weaken the franc on Thursday, to 1.0747 euros, after it had risen as high as 1.0257 euros earlier. Against the dollar, the franc traded at 74.1 centimes.

The franc, which has surged more than 30 percent against the euro in the past year, hit a record 1.0075 on Aug. 9.

Pegging the franc to the euro would be considered a drastic move, and the fact that policy makers are discussing it signals that Switzerland is running out of options to manage its runaway currency even as its economy shows signs of slowing.

The Swiss economy, which grew 2.6 percent last year, is expected to slow in coming months as the strong franc makes Swiss-made goods less competitive, especially in Europe, its biggest exporting bloc.

The strong franc is also causing havoc thousands of miles away, in Hungary, Poland and other parts of central Europe, where large numbers of borrowers took out home loans in Swiss francs or euros in recent years to take advantage of lower interest rates outside their own countries.

In Hungary alone, where an economic recovery has faltered recently, about 700,000 homeowners hold mortgages and others loans that were borrowed in francs when the Swiss currency was weaker. A stronger franc makes those loan payments more expensive. Alarm is growing, and Hungary’s financial market supervisory authority warned Thursday that large numbers of foreign currency loan holders would be late with repayments.

Despite Swiss authorities’ efforts to stem the franc’s surge, recent actions — including cutting interest rates close to zero last week and raising the supply of cash in the franc money market this week — have practically fallen into a black hole.

A peg to another currency is considered anathema to many Swiss, who have prided themselves on not joining the European Union, not to mention the euro monetary union, which they believe would only weaken the nation over time.

In any case, a peg would require changing the Swiss constitution, which has regulated the currency since 1850. And it would mean the Swiss central bank would risk ceding some of its independence to the European Central Bank, which manages the euro. It was also not immediately clear how a peg would be implemented at a technical level.

A euro peg “is certainly not the easiest plan to put in place, either politically or legally,” Mr. Danthine acknowledged.

Business people and Swiss citizens would also be loath to see their cherished currency linked to a European monetary union gripped by crisis.

Pegging the currency would be “a big risk,” Thomas Christen, the chief executive of Reed Electronics, a Lucerne-based company, said in a recent interview. “Then you can’t move; you are not free and our reasoning in Switzerland is to be free in these decisions.”

Some politicians had recently floated the idea, he added, “but a lot of Swiss people don’t want to do this step.”

Still, the strong franc has already hit big industrial firms like Clariant and Lonza, two chemical makers. Swatch, the big watchmaker, recently warned about the “extremely problematic” run-up in the currency, even though it reported record half-year profit and sales.

Swiss exporters like Mr. Christen have had to hedge against sharp fluctuations in the currency, and many more Swiss businesses have already been hit at the margins. Many are starting to buy cheaper materials to make even high-caliber products in order to offset the cost.

OSEC, a large trade group that represents Swiss businesses, said it has been encouraging Swiss firms to sell more goods in emerging markets and the Middle East in order to offset the exporters’ traditional dependence on Europe and the United States.

And many will simply be forced to become more innovative. “Because we’re not a big country we can move very fast, and try to use this as an opportunity to become more competitive,” Mr. Christen said.

In the meantime, “the problem is the rest of the world knows Switzerland is safe,” he said. “But we don’t say, ‘be careful,’ because it will also make our economy go down.”

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