Bank of America Merrill Lynch said in its latest research report that its model can only explain 2 percent drop in gold prices, not a 16 percent collapse. The BAML research team developed a model in 2009 to explain gold price changes considering variables like the dollar movement, real rates, commodity prices and BAML’s Global Financial Stress Indicator (GFSI).
The basic idea behind the model was that the yellow metal absorbs risk from other markets, and is subject to just a few small risks. Bank of America Merrill Lynch claims that its model has a good track record, but it can only explain 2 percent price drop in two trading sessions. Even after adding trading volume as a variable, it can explain only 4.5 percent decline in gold.
Before this, gold prices showed similar downward trend way back in 1983 by falling over 14 percent in just two sessions. Talking about the latest gold price collapse, BAML analysts said that the drop was triggered by the central bank gold sales in Europe and poor Chinese economic data.
The precious metal has been declining steadily since October 2012 due to high real interest rates and a stronger dollar. The recent drastic decline comes at a time when disinflationary macro pressures are building up. The analysts said that fears of potential central bank gold selling and disinflation were enough to trigger a dramatic collapse.
The dramatic fall has raised concerns about the reputation of gold as a safe haven in troubled times, and as a hedge against inflation. Now there is a breakdown in technical and fundamental support for the precious metal, so analysts have removed their $2000 per ounce price target for 2014. Analysts might have awakened now, but we predicted the risk when gold was soaring.
However, BAML still believes that the prices should rise to $1,500 per ounce in the medium term as jewelry demand picks up. Even if there is a further downside, that should be limited to an additional $150 per ounce. Analysts estimate that the jewelry demand would become so strong by 2016 that the prices may well go above $1,500 per ounce.
Bank of American Merrill Lynch estimates that the gold price movement of every $45/ounce represents a net gold sale of 100 tons. So, the last two days’ collapse suggests that 480 tons of gold, or 20% of annual global mine supply was sold within two days.