Gold Price Falls to $1,750 as Confidence Rebounds

GOLD PRICE NEWS – The gold price moved lower Friday morning, falling $14.05 to $1,750 per ounce.  Risk appetites rebounded, sending the price of gold moved to the downside and global stock markets broadly higher.  The European Stoxx 600 climbed over 2%.  Gold prices advanced after initially falling on the news that France, Italy, Spain and Belgium would temporarily ban short-selling on select stocks in order to calm volatility.  Bond yields in Italy and Spain fell on rising confidence as well as expectations that the European Central Bank will continue to purchase the sovereign debt of its fiscally-strapped member states.

On Thursday, the gold price plunged after the CME raised margin requirements on the yellow metal and U.S. weekly jobless claims came in better than expected.  Early yesterday morning, the price of gold reached a new all-time record high of $1,815 per ounce, but turned sharply lower as investors moved into cyclically-sensitive commodities and equities.  The spot gold price settled lower by 2.1% at $1,756.58, marking its worst day since a 2.8% tumble on May 5, 2011.

Silver dropped alongside the gold price, but by considerably less than the yellow metal.  The spot price of silver, which hovered near unchanged Friday morning, retreated 1.5% to $38.70 per ounce during yesterday’s session.  The prices of gold and silver remained higher year-to-date by 23.3% and 25.1%, respectively.

Precious metals shares fared far better than the price of gold and silver as the Philadelphia Gold & Silver Index (XAU) rallied 1.5% to 208.65.  Among gold producers, Gold Fields (GFI) and Newmont Mining (NEM) climbed 2.2% and 4.5%, respectively.  Silver Wheaton (SLW) and Silver Standard Resources (SSRI), two of the world’s largest silver companies, advanced 0.7% and 2.1%, respectively.

Gold and silver shares were lifted by significant gains in the broader market with the Dow Jones Industrial Average (DJIA) surging 4.0% to 11,143.31.  Risk aversion fell noticeably, evidenced by the 9.3% drop to 39.0 in the CBOE Volatility Index (VIX).  The currency markets were relative stable, with the euro rising 0.3% to 1.4225 against the U.S. dollar.

Weakness in the gold price came after the CME Group announced an increase in margin requirements on trading in gold futures.  The margin hike followed a substantial increase in gold volatility in recent weeks a common maneuver used by the exchanges to calm outsized price movements.

Commenting on the CME’s decision, Dennis Gartman applauded the move.  “This is long overdue, and the CME is correct in having done so,” he wrote in The Gartman Letter.

Edel Tully, a precious metals analyst at UBS, offered similar comments.  “Considering the large price swings in gold this week, it is not altogether surprising that CME has reacted,” Tully stated.

However, she reiterated her longer-term bullish outlook on the gold price.  “While some corrective price action is very likely for gold, particularly from the fresh longs put on this week,” Tully continued, “any pullback will be welcomed by investors who have been waiting for a better buying opportunity.”

Along with the CME’s margin hike, an encouraging U.S. economic report helped pressure the gold price on Thursday.  Weekly jobless claims came in at 395,000, below the 405,000 consensus estimate among economists.  Moreover, yesterday’s report marked the first week since early April that jobless claims fell below the key 400,000 level.

The better than expected data marked a noteworthy change from a plethora of disappointing economic reports in recent months.  The worsening economic backdrop has fueled calls for the Federal Reserve to launch a third round of quantitative easing (QE3) to provide further monetary stimulus to the struggling economy.  These calls have, in turn, helped lift gold prices to a series of new all-time highs in recent weeks.

While the latest jobless claims data provided a breath of fresh air, it will take several more positive reports to mark a change in the economy’s downward trend.  Until such a development occurs, the gold price is likely to remain well supported, notwithstanding sharp corrections as witnessed yesterday.