Following what was, in retrospect, a hugely successful bear raid on gold initiated with Sunday night/Monday morning’s flash crash, continued with less publicised market interventions, gold fell Friday at one time to below the chart-significant $1080 level.
It did make something of a sharp recovery after that, even crossing up through the $1100 mark in later trading that day and closing for the weekend at $1099.50.
The gold price fall has seen some significant withdrawals from the big gold ETFs – notably the SPDR Gold ETF (GLD) – with the gold freed up almost certainly being used to further depress the market as it was in 2013.
Deja vu all over again, as Yogi Berra would have put it!
To recap – in 2013 gold fell from a beginning of the year level of $1681.50 at the LBMA morning fix on January 2nd to 1201.50 at the close on December 31st, a decline of 28.5% – despite what appeared to be record gold buying from China.
Withdrawals from the Shanghai Gold Exchange hit a little under 120 tonnes in a single week in April that year and a year’s total of a massive 2,181 tonnes – almost 70% of global new mined production.
This year, gold opened in London on January 2nd at $1184.25. A similar 28.5% decline would take the year-end gold price down to just below the $850 level. Is this what’s in store for gold this year?
That would be even lower than some of the most bearish gold analysts are forecasting.
Now if the price continues to fall, at some stage gold will start looking so cheap that a flood of buying will undoubtedly reverse the current downwards trend, but with the plethora of anti-gold sentiment expressed in the media this may yet be some way off time-wise.
A continuing price fall will also lead to accelerated closure of a number of gold mining operations around the world, and bring an abrupt halt to many – or even most – new gold mine developments which, between them, will change gold supply/demand fundamentals rather faster than has previously been anticipated.
Base metals prices, which have mostly come back even further than gold will also mean something similar for many mines that would otherwise produce gold as a significant by-product.
It will be interesting to see what Chinese and Indian buying does now – anecdotal evidence suggests that purchasing has risen very sharply in the past couple of weeks and we are already beginning to see how intense this has really been with the latest data out of the Shanghai Gold Exchange.
SGE figures are published weekly on Fridays so we have now seen the level for the week ended July 17th, before the bear raid, hit just over 69 tonnes – the fifth highest weekly total ever at what is normally a weak time of year.
But the really significant figure for the most recent week with gold crashing to a 5 ½ year low will have to wait until the July 31st announcement to see whether the Chinese are remaining buyers at low levels, or have been disillusioned by gold’s performance over the past couple of years so as now for many prospective purchasers to be giving it a miss altogether.
The same may be true for India. There is anecdotal evidence that gold price discounts there have become premiums suggesting at least some demand pick-up.
It does also remain interesting to note that in some other significant currencies, despite the drastic US dollar price fall, the gold price has been pretty well flat over the year to date (in the Euro) and has actually even risen a little (Canadian and Australian dollars).
With Australia and Canada being the world’s second and seventh largest gold producers the gold price cloud there still has a silver lining!
But the big question facing the gold investor is where is the price going from here?
From a technical perspective, if it falls below the key $1080 support level, the next rack downwards could be to $1050 or even lower.
But the lower gold goes, the bigger the potential for a major turnaround as sentiment swings from negative to bargain hunting positive. What goes down will eventually come back up – the big question is how far will it fall first and then when will a sustainable recovery set in.
Some technical analysts think now is the time for a very big gold price surge, but while they may look for specific retracement levels under Dow Theory or Fibonacci Sequences the reality is that psychological levels like $1050 or $1000 for gold may actually prove to be even more important in the support context and $1150 and $1200 as the next big potential break-out hiatus levels on the upside.
There is a suspicion that last Sunday’s/Monday’s flash crash was overdone and far too blatant in that it has put financial market manipulation, and that of gold in particular, firmly into the gunsights of the global media – not before time.
Did the bears who precipitated the sharp fall overdo it this time? Could this lead to the change in sentiment gold needs as a prelude to a significant recovery? Has gold reached its bottom at last? Gold miners and investors will be hoping against hope that this is indeed the case.