Michael Phelps' Gold Triumph, But Not In Value

Michael Phelps should be considered as one of the best athletes of all times after his winning streak of eight gold medals at this year's Olympic Games. But while on the topic of gold, another major event transpired during the past couple of weeks, namely some significant price reversions in precious and base metal prices.

"In the past month, as the Olympic games featuring the famously ambitious US swimmer got under way, the value of the metal awarded to winners has slumped by a fifth. Runners-up, as usual, fare worse, with silver down almost a third.

The proximate cause is the US dollar’s rebound. In the past year, gold and its silver sidekick have moved inversely with the greenback. The violence of the shift suggests other factors are also at work. Crude oil is one, with the commodity-in-chief’s own rapid decline possibly forcing some to liquidate metals positions.

The wider issue is that, when even war in Georgia fails to lift prices, commodities markets as a whole appear angst-ridden. Indian brides are shunning gold jewellery, with demand falling 41 per cent year on year in the second quarter, according to Lehman Brothers. Even China’s supposedly inexorable march to mass middle-class prosperity is not immune: growth in sales of SUVs and light trucks there slowed last month to its lowest pace in two years. Meanwhile, Congressional ire against “speculators” continues to mount.

Metals are not doomed to fall in unison from here, with geopolitics, currency moves and the relative performance of financial markets all having a say. But the drumbeat of demand destruction is becoming deafening. Simply going long and holding on is looking ever less tenable."

Quoted from: Lex, 2008. "Metals and the dollar", FT.com, Published August 17.