Gold Price Drops Again, Sinks 10% in 3 Days

GOLD PRICE NEWS – The gold price fell again Thursday, sinking $28.75 to $1,730.50 per ounce.  The price of gold fell as low as $1,704 this morning – a level that is 10.9% off the $1,913 high posted earlier this week.  Heavy liquidation of COMEX gold futures weighed on the yellow metal.

Helping to pressure gold prices was the news, announced after the close of trading yesterday, that the CME Group boosted margin requirements to trade gold.  The exchange raised initial margin requirements to $9,450 from $7,425 per contract, which controls 100 ounces of gold, and maintenance margin requirements to $7,000 from $5,500.

On Wednesday, the gold price plummeted $70.36 to $1,759.27 per ounce as broad-based liquidation engulfed the precious metals space.  The spot price of gold opened modestly higher, but quickly turned sharply lower, breaking through several levels of support.  The SPDR Gold Trust (GLD), a proxy for the gold price and the world’s largest gold ETF, tumbled $6.02, or 3.4%, to $171.64 per share.

While the spot price of gold fell 3.9%, gold futures posted even more substantial losses.  COMEX gold futures, per the December contract, plummeted by $104.00, or 5.6%, to $1,757.30 per ounce.  In doing so, gold futures suffered their third largest single-day decline ever – following losses of 7.3% on June 13, 2006 and 5.8% on March 19, 2008.

Silver was hammered alongside the gold price, falling $2.19, or 5.2%, to $39.71 per ounce.  Gold and silver equities suffered steep losses as well, but did manage to outperform the metals.  The Philadelphia Gold & Silver Index slid as much as 4.0%, but pared its losses to close lower by just 2.0%.  The world’s two largest gold companies – Barrick Gold (ABX) and Goldcorp (GG) – were among the worst performers on Wednesday, as they fell 3.4% and 3.6%, respectively.

Commenting on the recent weakness in the gold price, Scotia Mocatta strategist Simon Weeks wrote in a note to clients that “The writing has been on the wall for the last few days that gold was heading for a fall.  Stops and sentiment driven buying do not constitute a solid driving force for sustaining upside momentum.  The selling that we have been seeing however, is of much better quality and thus it was a matter of time before gold tripped and especially so with ETFs giving back inventory and with gold giving up gains on the crosses.”

Another investment bank, Dundee Securities, attempted to forecast the duration and severity of the current  gold price sell-off.  Paul Burchell, a strategist with the firm, wrote in a report that “Our review of gold prices suggests that the duration and severity of a correction in the price of the yellow metal may be influenced by the preceding rally.”

The Dundee strategist noted that over the past six and a half years, on average approximately 44% of the gains made during rallies “have been eroded in subsequent corrective periods.”  As for the duration of the gold price corrections, they have lasted approximately 42% as many weeks as the prior rally.

The most recent gold price advance totaled $395 from July 1 to August 22.  Based on the average historical data, Burchell determined that the current correction in the price of gold would take the yellow metal to approximately $1,700 per ounce over the course of three weeks.  In a more extreme scenario, the gold price could fall to $1,625 per ounce within a five-week timeframe.

Over the longer-term, however, the Dundee strategist reiterated his bullish stance.  “As we have stated many times in the past, we remain bullish on the price of gold, and expect bullion to continue its upward trek (and defy gravity) as long as the motivating factors of fear and uncertainty surrounding the world’s economies and monetary systems continue,” he wrote.  “In fact, we would be so bold as to suggest the party (for gold bugs, at least) won’t end until real interest rates turn sharply positive.”