Gold Price Rebounds, Awaits Bernanke

The gold price rebounded Wednesday, gaining $24.74 to $1,854.37 per ounce, after plunging $67.90, or 3.6%, to $1,829.63 per ounce yesterday amid widespread liquidation in precious metals.  The spot price of gold sank after climbing to a new all-time record high of $1,913.60, but subsequently plummeted as investors and traders booked profits in the yellow metal.  In doing so, the spot price of gold posted its largest single-day decline since a 3.7% drop on July 1, 2010.

One factor contributing to the decline in the gold price was the Shanghai Gold Exchange’s decision to hike margins to 12%.  The move was aimed at limiting excessive risk taking following the relentless gold price rally in recent weeks.  Commenting on the margin increase, Li Ning – an analyst at CIFCO Futures in Shanghai – stated in an interview with Reuters that “Gold prices on the global market have been rallying strongly and at an increasingly faster pace. The margin hike is a pre-emptive move in case prices crashed and caused great volatility in the market.”

Commenting on the gold price sell-off, TD Securities wrote the following in a note to clients:  “Technically, a very poor day for gold.  A new high, a lower low (below Monday’s) and a (very likely) lower close combine to form a bearish key reversal signal on the daily chart today.”

“There are a couple of things to note,” the firm continued.  “On the one hand, we have been here before; the daily chart shows a number of outside range reversal signals in the past few months (at least) that have not had any traction with the markets.  The ‘reversal’ has amounted to sometimes no more than a day or so of non-appreciation before the underlying bull trend resumes powerfully.  On the other hand, the signals are tending to grow in size – and therefore technical stature.  In theory, the bigger the reversal signal, the more impact it might have.”

TD Securities went on to say that “A shake out in the bull trend would not be entirely unexpected even if a move lower from current levels would fall a little short of the mid $1,900 area we had thought reachable as part of this move.  But this market has priors and the lesson of the last few months is that corrections tend to shallow and short-lived.”

If a meaningful gold price correction ensues, the firm forecasted that “there will be good support in the $1,800/$1,810 area but below here, the market may drop back to the $1,700/$1,750 area.”  Lastly, it stated that “We would need a lot more evidence – and subsequent confirmation – to call a technical end to this rally at the moment.”

Silver traded near unchanged Wednesday morning after tumbling yesterday in concert with the gold price.  Gold’s sister precious metal hovered just under $42.00 per ounce following Tuesday’s 4.3% decline.  Weakness in the prices of gold and silver put significant pressure on shares of precious metals companies.  The Philadelphia Gold & Silver Index (XAU), a basket of the sector’s largest components, fell 2.5% to 211.60.

Gold Fields (GFI) and Randgold Resources (GOLD) were two of the worst performing gold equities, as they dropped 7.3% and 6.1%, respectively.  Among silver shares, Silver Wheaton (SLW) and Silver Standard Resources (SSRI) retreated 3.7% and 2.9%, respectively.  Gold mining stocks moved marginally higher early Wednesday on the back of stronger gold prices.

Investors and traders are eagerly awaiting Chairman Bernanke’s testimony at Jackson Hole, Wyoming on Friday.  It was here that the Federal Reserve Chairman announced the second round of asset purchases and many are clinging to the hope that a third version of quantitative easing is forthcoming.  However, given the uptick in inflation over the past year, Bernanke will probably save the few remaining bullets he has in his quiver.  Gold prices would certainly get a boost should a new round of money printing be announced, but QE3 – for the time being –appears to be a long shot.