Bullion bloodbath: Gold price sinks

Gold price suffered a massive decline of 5.6 per cent, or $87 per ounce, on Friday, crash-landing at a 22-month low of $1,477 per ounce.

Reports suggest that a 4 million ounce (124.4 tonnes) sell-order, worth $6 billion (Dh22 billion) at current prices, by a large investment bank spooked the markets and led to this decline.

“It appears that the significant selling pressure last Friday was amplified by a four million ounces (124.4 tons of gold) selling order, to be executed on Comex opening. This was clearly too much for a relatively empty market to handle, and the initial pressure resulted into waves of selling, which in turn attracted further selling all the way down,” Gerhard Schubert, Head of Precious Metals at Dubai-based Emirates NBD, wrote in his weekly report.

“The price for gold is now at par with the price for platinum. This is a very difficult report to write,” he penned at the beginning of his gold report.

Well, if rumours are to be believed, it’s going to be tougher still for him to write next week’s report.

READ: Updated: Gold price crashes to 2-year low of $1,425, and sinking…

For, Euro Zone’s troubled economy Cyprus is all set to add to that chaos by reportedly putting its €400 million (Dh1.93 billion) worth of gold on the block, in a bid to shore up its financial health.

In what analysts are terming as a make-or-break moment for the precious metal, gold has failed all safe haven tests and, for the first time in about two years, plunged below the $1,500 mark.

Indeed, it doesn’t seem too good for the gold bull. Gold last saw these levels in July 2011, after which it began its very fast and very steep incline to breach the $1,920/oz mark in September 2011.

Since then, however, the metal is now down by a quarter (23 per cent) – officially in a bear market. It was already, technically speaking, in a recession as the price of gold had shown negative growth for two consecutive quarters (Q4 2012 and Q1 2013).

With this most recent plunge, gold has wiped off almost two years of gains for its loyal investors, with those who pledged their hard-earned money in the safe haven precious metal now in negative equity.

To be fair, just last week we suggested that with the global economy getting back on track, and in the absence of a global shock like the Korean war, gold is set to fall back closer to levels that it saw before the 2008 recession took hold (read: Gold recovers to $1,581, but here’s why it may crash to $1,000).

“The gold market has, more or less, officially slid into a bear market. The popular definition of a bear market is when the commodity in question not only trades but closes at a level of at least 20 per cent under its all-time highs. The reverse psychology indicates that only a close above $1,776 would re-establish the bull market,” wrote Schubert.

That level, for one, looks more elusive than ever. “It appears that any price rally in the near future can and will only be described as short covering rallies,” says Schubert.

“I do expect the market to see some short covering next week, as the market closed on the multi-year low. The former support area of $1,526 will become now a formidable resistance area. However, technical selling can be expected on Comex opening on Monday, based on models, which have received sell signals based on last Friday’s close,” he says.

So what happened last week?

While there are many reasons, a couple of factors were the most overbearing on gold price.

One, Cyprus seems set to offload €400 million (Dh1.93 billion) of its gold reserved in a last-ditch attempt to save face – and its economy. And if Cyprus does so, there is no reason why other Euro Zone economies in the same dire straits – Italy, Portugal, Spain, Hungary, Slovenia… there are plenty in line – won’t do it.

In addition, if they really ‘have’ to sell their family silver, it will make sense for other beleaguered European economies to sell it now rather than after the Cyprus sell-off has pushed gold further down. That is going to see a scramble among European nations as to who sells earlier, and that can’t be good news for the price of gold. In fact, it will be very bad for it.

“It [The Cyprus sell-off] is a make-or-break moment for gold… if the market can’t handle the reallocation and Cyprus, then there is really a need for a bear market,” Milko Markov, an investment analyst at SK Hart Management, has been quoted as saying.

And it isn’t just Cyprus and other euro Zone nations’ potential dumping of the yellow metal that is putting negative pressure on gold prices.

On Wednesday, leaked minutes of the latest US Federal Open Market Committee (FOMC) meeting showed that several members of the committee now believe that the benefits of quantitative easing programme are diminishing, and that costs of the $85 billion per month bond purchases outweigh the benefits.

This means that this flow of surplus dollars into the market – quite a few of which found their way into gold investments – will stop, leading to demand drying up for the yellow metal.

The US Federal Reserve has, so far, poured more than $3 trillion of easy money into the US since December 2008, when the first round of quantitative easing program was unleashed.

Now that the US Fed is making noises about cutting off that lifeline, gold price will get a nasty shock when – not if – the QE programme comes to a logical end.

Additionally, a number of analysts including investment banks Goldman Sachs and UBS have recently further slashed their average gold price forecast for 2013. Goldman Sachs has cut its 2013 average gold price forecast for a second time within just six weeks, this time from $1,610/oz to $1,545/oz. UBS seems to be a gold price optimist, but it too has slashed its forecast from $1,900/oz to $1,740/oz.

These downgrades are linked to the possibility of an early end of the US Federal Reserve-funded QE programme, which comes with gold-negative factors such as investment flowing into equities, low inflation, improving economic growth, and a stronger US dollar.

With loads of investors dumping paper gold (ETFs) in record numbers during the first three months of 2013, the writing is on the wall for the future of gold.

[Image via Shutterstock]

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