Gold Plunges by 11% But Doesn't Change Long-Term Fundamentals

By: Adrian_Ash

THE PRICE OF GOLD in professional wholesale dealing sank further on Thursday morning, plunging to a 9-session low of $1704 early in London – a drop of more than $200 per ounce from Tuesday's new record high.

"A glance at the gold price on a logarithmic scale suggests a correction was overdue," says Societe Generale's daily "macro" note.

"[But] the spectre of higher core inflation [as highlighted by last week's US consumer-price data] can only add to the attractiveness of gold, especially with interest rates so low.

"This makes the 11% decline since Tuesday’s peak seem all the more bizarre."

Pointing to what he calls "the key level on the weekly chart of $1729," Russell Browne at Scotia Mocatta says that a "break of this level would indicate an 'Outside Week' [with prices setting new highs but falling sharply lower] and warn of a deeper correction."

The 11% fall in the gold price "would be more concerning" however, says a note from Mitsui's London team, "were it not for the fact that gold's meteoric rise over the past month makes retracements of this size relatively unsurprising.

"Moreover, we maintain that the economic fundamentals that have been bullish for gold remain so, and that corrections such as this do not make the target price of $2000 any less realistic."

Wednesday brought heavy sales of gold both in the US derivatives and exchange-traded trust fund markets.

The SPDR Gold Trust ETF – larger by value than even the S&P500 ETF on Monday – shed another 26 tonnes of bullion as share-holders exited the fund, taking this week's tonnage drop to 4.5%.

US derivatives exchange the CME meantime raised margin payments on its gold futures for the second time in two weeks, taking the initial and maintenance payments to trade 100-ounce contracts more than 55% higher from mid-August.

"The margin hike...contributed to the liquidation," reckons David Thurtell at Citigroup.

"A lot of hot money has entered the complex and the rally was done too much in too short a time."

Citing volatility in gold prices as the reason – rather than the absolute price level – "I think we're seeing more and more diversification in people's portfolios," said CME executive chairman Terry Duffy to FoxBusiness overnight.

"Commodities are now definitely [used]...for diversification, where 10 or 12 years ago people didn't [even] see them as an asset class."

Broad commodity indices held little changed Thursday, as food-stuffs fell but energy and base metals ticked higher.

Swiss investment bank UBS today cut its growth forecast for China – now the world's No.2 private gold consumer – thanks to "much weaker growth prospects in developed economies.

"A significant drop in export growth, which could start in the fourth-quarter of 2011, is also expected to affect manufacturing investment and consumption," says UBS economist Tao Wang.

Rising 25% by tonnage in the year to July, private Chinese gold demand has doubled over the last decade to equal nearly 2% of annual household savings.

Looking ahead to Friday's much-anticipated Jackson Hole central banking speech from Ben Bernanke of the Federal Reserve, "We await further evidence on the softness of the US economy before we would consider QE3 our base case," says today's note from Standard Bank's commodity team.

"[But] regardless of additional quantitative easing, we believe that the long-term upside for gold remains in place."

Foreign exchange rates were meanwhile little changed Thursday morning as global stock markets rose, leaving the gold price drop for non-Dollar investors also around 10% from Tuesday's new record highs.

By Adrian Ash
BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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