Gold Prices Dip After Margin Hike on Shanghai Gold Exchange

GOLD PRICE NEWS – The gold price traded lower Tuesday morning, sinking $14.50 to $1,883 per ounce, after the Shanghai Gold Exchange hiked margins to 12%.  Gold prices turned lower following the news out of China after hitting a new all-time high of $1,913 overnight.

More cyclically-sensitive asset classes advanced with crude oil rising 1.4% to $85.60 per barrel and agricultural commodities moving higher across the board.  S&P 500 stock futures gained 12.10 to 1135.40.  The U.S. dollar fell 0.6% versus a basket of foreign currencies, as measured by the U.S. Dollar Index.

On Monday, the gold price passed $1,900 per ounce for the first time on its way to yet another series of new record highs.  COMEX gold futures, per the December contract, reached a new high of $1,917.90 per ounce Monday evening.  The spot price of gold climbed to fresh all-time highs on the back of speculation that Fed Chairman Bernanke was contemplating a third round of quantitative easing (QE3).

The recent deterioration in economic data and worries over a double-dip recession has led investors to increase their allocations to gold and investments tied to the gold price.  The SPDR Gold Trust (GLD) – a proxy for the price of gold and the largest gold exchange-traded fund (ETF) – eclipsed the SPDR S&P 500 ETF (SPY) to become the world’s largest ETF, based on net assets.

Strength in the gold price has sparked a broad-based rally in precious metals with silver climbing 1.9% yesterday.  However, silver price moved lower Tuesday morning, declining $0.77 to $42.98 per ounce.  Despite today’s weakness, gold’s sister precious metal remains perched near 3-month highs.  Platinum, whose nominal price was surpassed by gold last week for the first time since 2008, retook the lead from the yellow metal by advancing $28.50, or 1.3%, to a three-year high of $1,903.40 per ounce.

Gold and silver equities posted strong gains during yesterday’s trading session with the Philadelphia Gold & Silver Index (XAU) jumping 3.2% to 217.12.  Among gold producers, two of the largest advancers were Harmony Gold (HMY) and Kinross Gold (KGC), which surged 7.9% and 5.1%, respectively.  Pan American Silver (PAAS) and Silver Standard Resources (SSRI), two of the top performing silver companies on Monday, soared 8.4% and 9.0%, respectively.

Commenting on the gold price rally, analysts at Wells Fargo wrote in a note to clients that “Investors’ concerns about the validity and efficacy of the U.S. debt deal, uncertainty about further deficit reduction suggestions … continued dollar weakness and the worsening of the European debt crisis all appear to have helped push gold even higher.  While gold appears to be getting a bit frothy, its ascent is justified by the fundamentals.”

While Wells Fargo may be correct about the fundamentals supporting the gold price, the yellow metal could be due for a correction in the short-to-intermediate term.  Market Vane’s Bullish Consensus reading on the gold price, a closely-followed sentiment indicator, came in at 93% on Monday.  Such a high level has historically been associated with intermediate-term peaks in the price of gold and has frequently served as a warning sign, from a contrarian perspective.