Gold falls below $1,700 on China trade slowdown

In the Lead: “Minding the gaps”

Stepping away from technical charts for a moment, we note that the McClellan Report found that ETF investors did not appear to react to gold’s most recent drop in the fashion that they were expected to. This gap between price action and “capitulation” worries Tom McClellan, the author of the eponymous market report. He tenders that “When we see a very fast drop in ETF assets that is the sign of public fear about gold prices that marks a good bottom for gold prices. But when you see these assets rise as gold prices are falling, those instances are typically followed by a further decline in gold prices, to more completely scare people away so that the next uptrend can begin."  A very interesting take on the eventual bursting of the gold bubble has been reported by Investment Europe today. The article quotes State Street Global Advisors’ (the marketing agent for the SPDR Gold Trust [GLD]) Chris Goolgasian as opining that while gold is not (yet) inside of such a soap-film sphere, the unraveling could eventually bring a lot of pain to ill-prepared and/or overloaded gold investors. Mr. Goolgasian remarks that “If investors decide to flee gold as an investment, then gold the asset class will be crushed. We think [the aftermath] could be monumentally bad."

Dotcom or tech bubble comparisons, anyone? Mr. Goolgasian asks us to “Consider that gold is both a single security and almost an entire asset class on its own. When the tech bubble happened, you could have moved to financials and kept your equity weight in line, or even within tech, you could have underweighted web companies and over-weighted hardware, semiconductors or software. There were numerous ways in which an investor – with good hindsight of course – could have fled the troubled securities, yet still had similar equity exposure. In a way, this prevented the web bubble from being even worse.

Alas, Mr. Goolgasian cautions, “Gold has none of this in its favor. There are no ‘offshoots' that investors can transition to which will cushion the asset class fall. Furthermore, without any valuation support to cling to, investors may have a hard time rationalizing holding on if a free-fall begins. The end of gold could be quicker and more severe than the technology or real estate bubbles."

Meanwhile, on the fundamentals’ front, we have news that at least one central bank appears "sated" with gold intake. Taiwan central bank governor informs that while his institution made some nice money on the purchases it made in 2008, it does not plan to acquire more of this “risky asset.” The governor also said that Taiwan does not plan to reduce its $177.3 billion in US Treasury holdings and that one of his main concerns – despite not adding to the country’s gold holdings – remains inflation.

A fairly hefty drop was also noted in black gold; it fell $1.45 to just under $106 per barrel in the wake of news that US production is quite robust whereas supply anxieties related to the Middle East experienced an easing. Global growth concerns (China) continue to weigh on the minds of speculators in oil as well. Rhodium remained flat at $1,475 on the bid-side. Copper declined nearly 1% and the US dollar orbited in and around the pivotal 80 marker on the trade-weighted index; the highest level since late January.

Platinum actually managed a small ($2) gain this morning and climbed to the $1,684 mark per ounce while palladium was down by about $5 at the $703 level. Standard Bank’s morning report indicates that there is a chance that “platinum and palladium will continue to struggle in Q1:12 on the back of a lack of real demand. For this reason, we feel that a price above $1,650, for platinum, and $700, for palladium, will be difficult to sustain. However, on the downside, platinum and palladium at $1,500 and $600 respectively, is too low, based on cost pressures in the industry.”

Until Wednesday, the day after the Fed, we go back to scanning the greenback…and minding the gaps.

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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