A few weeks ago I wrote in this blog words to the effect that I was surprised that gold had not reacted more positively to the Bank of Japan’s massive programme of Quantitative easing. As can be the case, failure on the part of the markets to react in the expected fashion to a piece of news, such as the BOJ’s QE, was THE most valuable of market indicators, giving the clearest possible indication of market positioning, and hence we saw gold’s “flash crash” on 15th April.
Am I chastened? Yes. Have I changed my medium-term view that gold is a must-have holding for any portfolio? No.
Since that day, when gold futures hit a low of $1361.10 per Troy ounce, gold has bounced back to $1470 as I write – a rise of 8 per cent and a pretty good “dead-cat” bounce.
Among the many theories propounded to explain the “flash crash” was that which suggested that investors took fright as, such was the size of the BOJ’s money-printing operation, the US Federal Reserve may feel the pressure had been taken off to perpetuate its own QE programme. Any such fears have subsequently been put to rest , first by a concerted barrage of dovish comment from the Federal Reserve’s ruling elite, and then by anaemic 1st quarter US GDP figures, which went to underline the need for continued monetary accommodation in the US.
It seems likely that the BOJ’s QE may have inspired locals to become bullish on the prospects for domestic investments, such as equities, leading them to liquidate holdings in other assets, such as gold, to bring money home.
Now the dust has settled, investors are once again focussing on the almost ubiquitous use of quantitative easing to combat economic stagnation and also the stealthy way in which central banks’ mandates have quietly been tweaked to focus less on inflation and more on employment.
I believe we will look back on the gold “flash crash” of April 15th 2013 and see it in the same light as the US stock market “flash crash” of May 6th 2010, which may well have shared some of the same causes, and which in retrospect represented a great buying opportunity.