Gold investors have been crushed in the last few days after it was revealed that China holds far less gold in its central bank reserves than was widely believed, and after rumours that a major Chinese investor liquidated a large bloc of gold very suddenly on July 20.
Don't blame China though, Morgan Stanley says. It's the macro fundamentals of the global economy that are driving down the price of gold, which Price et al. refer to as the "Last Bastion, Besieged":
Gold bulls disregard the PBoC report as misleading, believing China's holdings to be larger still. Bears say that gold buying by China will probably only be offset by selling elsewhere. We see the PBoC announcement as just the latest in a series of bearish events: 1. Greece's debt risk is slowly being neutralized; 2. robust US economic activity, and a looming interest rate hike to curb it, continues to buoy USD; 3. miners aggressively cutting opex (falling oil helping). The backdrop is deteriorating. Frustrating for Resources investors: until recently, Precious Metals was the last bastion in a faltering Commodity World.
... price stability in Precious Metals has ended. Indeed, gold and silver prices have been in trend decline since May. Why? The passing of deflation risk, anticipation of the US Federal Reserve's first interest rate hike, another debt resolution for Greece, and the collapse in China's equity markets (prompting loss-covering asset sales) - have all hit these prices over 8-10 weeks. So the PBoC's announcement last week, about China's surprisingly low official gold holdings, was really just the latest in a string of bearish events. It's possible that the next short- term driver in metal markets will be declining oil prices (WTI & Brent down 10-16% in 4 weeks).
Here's a chart. Note the gold line in a decline:
Bloomberg data / Morgan Stanley chart