[miningmx.com] — AFTER falling 11% last week, the precious yellow metal dropped 7.5% on Monday – its steepest one-day fall in five years – bringing the gold price down 20% from its all time high of US$1,920.30 an ounce in early September.
This makes this month gold’s worst month in three years. By late afternoon, the precious metal had lost almost US$50 from the US$1,641.39 it was quoted at the JSE’s close on Friday to trade at US$1,591.50 – some US$328.80 from its all time high.
Many market watchers warned that a correction was coming and now they are saying the price is likely to bottom and level off before it starts to climb again.
“Gold has certainly taken a dive – and could stumble further in the days immediately ahead – but I think we will see the yellow metal begin its comeback sooner rather than later, possible in the next few days,” said Jeffrey Nichols, managing director of American Precious Metals Advisors.
In his latest Nichols On Gold note the gold and precious metals economist said the precious metal was “just an innocent bystander”. He said rather than any dramatic reversal in world physical markets it looked like the precipitous price decline in recent days could be blamed entirely on speculators including some prominent hedge funds and the trading desks of the big Wall Street banks, which have been reversing their positions or cashing out of gold altogether.
“Nothing that has occurred in the past few days in any way diminishes my long-term enthusiasm about gold-price prospects. The same bullish gold-market fundamentals and macroeconomic trends that I have been discussing for many years now remain in place and promise significantly higher gold prices over the next five years or longer,” Nichols said.
Investors cashing out of gold and getting back into cash, particularly the US dollar, demonstrates just how jittery investors are in uncertain markets.
While the threat of another global economic meltdown has not been dismissed, the US dollar is the sweetheart of investors.
“In times such as these, the US dollar does then reign supreme. It should and it shall. ‘Money’ is finding its way to its ultimate safe harbour, and clearly that is not the euro and that is not gold,” said Dennis Gartman in Monday’s Gartman Letter.
In the pecking order of safe havens precious metal rank well behind the US dollar and the dollar is the final bastion in panic.
“What is taking place in the metals is a classic question of margin clerks vs. the market; a game of ‘money’ and not a game of fundamentals,” said Gartman, adding that simply put, ‘money’ and ‘margins’ trump fundamentals.”
Interestingly, Sharps Pixley noted that the recent move in gold looks on the face of it like a ‘Lehman’s moment’.
Back in October 2008 when Lehman’s collapsed gold also fell as margin calls in collapsing equities were funded by the selling of profitable positions in gold.
RAND TANDEM
Gold’s move was counter-intuitive in that it did the opposite of what was widely expected. Moving counter to the US dollar, gold seems to be moving in tandem with the rand.
The rand flirted with levels around R8.50 last week with some forex traders warning the local currency could move through R9 to the US dollar. On Monday afternoon it was holding up well at levels around R8 against the greenback.
“For about a year and a half, our two currency models reflected that the rand was overvalued by close to two standard deviations, the extent of the recent sell off, was sudden and rapid. Based on our models now the Rand is fairly valued but usually it overshoots when it corrects from close to two standard deviations over/under valuation,” said Aeon Investment Management.
Aeon Investment Management also believes that the gold price is probably in a short term correction phase and will most likely start forming a base and appreciate towards the end of the year.
At these low prices the market has seen buyers snap up the precious metal, particularly in India where the wedding season is getting underway.
It is also a good time for those who want to get into gold at more reasonable levels and ahead of the next potential rally.
“If someone is silly enough to sell huge volumes of gold for effect – it is clear that there are plenty of investors willing to take that metal off their hands at a knock-down price. For gold bulls this will in hindsight be seen as the clearing out of exhausted longs – a pruning if you like – with new growth yet to come through,” said Sharps Pixley CEO Ross Norman.
“Where’s the next $200 in gold – we confidently predict to the upside,” said Norman.
