The early part of the day’s trading saw a rout on gold as the yellow metal suffered its worst two-day drop in decades, falling from a high of US$1,495 on Friday to a low of US$1,355 mid-morning on Monday.
Reasons cited for the dramatic plunge include concerns over lacklustre Chinese data and the knock-on effects this would represent to the global economic outlook, as well as threats of central bank sell-offs in Europe and a generally sluggish US outlook.
Unlike many other observers, however, CEO Ross Norman of London-based bullion brokers Sharps Pixley hesitates to attribute gold’s massive reversal of fortune to a marginally stronger US dollar, China’s weaker-than-expected first quarter figures, or the sceptre of Cyprus selling gold to shore up its position, citing Friday’s mass dumping of gold futures on the Comex and saying gold’s current collapse “is merely opportunistic in nature.”
The price of the yellow metal dropped more than 4 percent on Friday on account of an unprecedented offering of 400 tonnes – or US$20 billion – of gold futures on the COMEX, an amount corresponding to approximately 15 per cent of global annual production.
The bullish forecasts of late last year and the subsequent flurry of revisions to those forecasts prompted “a small number of hedge funds to test the market,” says Norman. “It opened the opportunity to hit gold big time.” Past shorts have coincided with bursts of optimism in January and October, and it was this positive mood, Norman says, that prompted hedge funds to test the resiliency of the bulls.
“Since then, China and the US have slacked off, but the case has been proven that if you short gold you can make darn good money, and that prompted opportunistic hedge funds to short.”
From here, Norman says, shorters target certain critical levels, such as US$1,540, which he calls “a real line in the sand. And they breezed through that and beyond,” gathering more like-minded shorters, inducing panic-selling and thus making greater margins.
“This move is a ruse, it’s wheeze, it’s a play. This is playground bully boys in the financial markets. But they have a problem now because now you have shorts and longs as well and they can’t both be right. You have a tug of war and only one side can win.”
While bears have the support of shocked headlines to “do their dirty work,” Norman emphasizes that bulls have reason to expect the market to arrest the freefall, if for no other reason than today’s prices have seen gold trading a level inside the cost of extracting the yellow metal from the ground.
“There is a floor for the gold price where the price of production kicks in. [When calculated using today’s prices] ten to 15 per cent of gold is being produced at a loss.”
With 3.5 million ounces in goldfields with an extraction cost of $US1,733 “more and more miners in high cost countries will be struggling. If you push the price lower, it will come back to its rightful level.”
Is there an end in sight? Not unless gold bounces back with sufficient alacrity to suggest it has found a floor. Until then, “the bears will continue to maul it.”
Gold for June delivery is currently trading at US$1,364.60 an ounce on the Comex.