Gold Bust: The latest leg in a 4-year bear market
Gold reached a 5-year low on Monday and likely faces more down side in the coming months as a growing number of speculators and investors are losing faith in the yellow metal.
Monday's fall was attributed to a combination of the coming tightening of US monetary policy (making it more expensive to finance holdings), a firmer USD and news that the People's Bank of China bought a lot less gold than anticipated (current holdings of 1,658 tonnes from 1,054 tonnes in 2009).
However, the catalyst appears to emanate from a flash of heavy selling on the Shanghai Gold Exchange. Reasons for that include someone selling their gold holdings so they could cover margin payments on equity holdings (Chinese stocks have been hammered recently) or it could have been to manipulate the market lower to close out on a short-sale at a profit.
The selling happened when much of the gold market was asleep and liquidity was particularly low. Whatever the reason it drove prices to a low of $1,088 troy/oz, last seen around March 2010.
Gold – short-term recovery unlikely to last
Less need for catastrophe insurance
Gold has basically been on a steady downward trajectory since hitting highs of $1,923 troy/oz in Aug 2011. When viewed from a 5-year or 20-year perspective gold was already in a bear market – Monday's action merely represents a new low with another important key support level of $1,130 (now resistance level) having already given away.
Gold thrives on bad news – particularly the end of the world variety, such as during the financial crisis in 2007-8. There have been plenty of dramas since then, such as taper tantrums and of course with Greece and the EUR, but nothing quite as dramatic as the events of 2007-8.
And though instability and uncertainty appear to be normal now, it's not enough to rekindle a gold rally. Clearly many investors feel little need to hold expensive 'catastrophe' insurance anymore in the form of gold.
Likely as more holders of the metal become disillusioned, prices will carry on slipping lower. Gold recovered from it's Monday lows to find support around $1,100 troy/oz – but this is likely to give away.
The big test for gold is if it falls below the psychologically important level of $1,000 troy/oz. Breaching those levels could see prices melt away quite quickly as investors abandon gold and speculators sense an increasingly compelling short-selling opportunity.
By Justin Pugsley, Markets Analyst MahiFX