Today gold suffered a dramatic fall, losing $131 from its high in Asia at $1,663 before slumping to a low of $1,532 just ahead of the London opening - a fall of 7.5%. Gold then promptly bounced and was last trading at $1,614 – such high levels of volatility are unusual – but then we live in unusual times. We have almost become inured to the idea that equities suffer these sort of price swings and to the order of magnitude that in olden times might have represented an entire years gain or loss... but bullion?
The recent move in gold looks on the face of it like a 'Lehman's moment.' Back in October 2008 when Lehman's collapsed, gold also fell as margin calls in collapsing equities were funded by the selling of profitable positions in gold. Gold's move was counter-intuitive in that it did the opposite of what was widely expected. In short, gold became part of the problem and not the solution for those concerned with wealth preservation... but only temporarily.
It is not immediately clear at this juncture who was selling or why – but in placing such a huge order into the market when the least number of market participants were active tells you that they were out for dramatic effect. Anyone looking to offload significant amounts of metal at the best possible price would have done so when both London and New York were both open – this would have ensured they would have hit the market when it was most liquid and ensured they got the best price for their sale. Clearly finessing gold into the market was not their motive – they wanted a statement.
Gold's fall has also affected two important 'requirements' from a technical or charts perspective – it will have satisfied those who saw gold as forming a double top that it has now completed that move – and it has filled a chart gap at $1,675 – both leave gold clear to move higher.
Gold's fall has created the most monumental buying opportunity and buyers in India are seizing the moment. Physical bullion in small bars and coins remain hard to come by in Europe underscoring just how strongly ordinary folk are keen to diversify their holding away from traditional asset classes such as equities and currencies.
With the VIX Index holding above 40 (last 41.25) it is clear that fear is still ruling the streets of the financial markets. It is also clear that gold's fundamentals are as attractive today as they were three weeks ago – or if you prefer, $300 ago. We fully expect gold to firm in the next few days and would be surprised if we were not back above $1,750 soon.
If someone is silly enough to sell huge volumes of gold for effect – it is clear that there are plenty of investors willing to take that metal off their hands at a knock-down price. For gold bulls this will in hindsight be seen as the clearing out of exhausted longs – a pruning if you like – with new growth yet to come through.
Where's the next $200 in gold – we confidently predict to the upside.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.