Yahoo Finance Crash for gold: Biggest-ever single day fall in price
Fears and panic selling have seen gold prices record thir biggest-ever single day fall - ‘You can't stand in front of a steam train’
Gold prices have plunged more than $100 an ounce in a day, their biggest ever decline in dollar terms, as panic selling drove the price to levels not seen since March 2011.
"You can't stand in front of a steam train – the market has to run itself out,” said Gerhard Max Schubert, head of commodities at Emirates NBD bank in Dubai.
"What we now see is panic selling,” said Dominic Schnider, an analyst at UBS Wealth Management.
Cash gold dropped to as low as $1,321.35 an ounce before recovering slightly overnight, but still about $560 below a lifetime high around $1,920 an ounce hit in September 2011.
Monday's drop of around $125 an ounce was higher than the previous biggest-ever rout on January 22, 1980, which came a day after gold hit its then-record $850 on global panic over oil-led inflation due to Soviet intervention in Afghanistan and the Iranian revolution.
Why now?
The gold price has risen steadily since 2001, that ended on Friday. Gold officially went into a bear (or recessionary) market then and on Monday it just got worse.
The news that Cyprus planned to sell €400m of gold was the trigger for the first falls - while the amount was small, the fear was other countries could follow suit and sell off their reserves.
Weaker than expected Chinese economic data on Monday morning simply gave traders another excuse to slash holdings. Investors cut exposure to gold, with total holdings at bullion gold-backed exchange-traded-funds falling to their lowest since early 2012.
“Gold has been on the rise for so long, and so strongly, that a big setback has become overdue,” said Adrian Ash, head of research at BullionVault.
“In US dollars, gold has gone up for 12 years straight; for UK investors, it's risen every year except one since 1998. That's a remarkable stretch, far longer than gold's successive gains in the 1970s and longer even than the US stock market's record-breaking run from 1982 to 1989.”
How low can it go?
Conservative estimates think the gold price will drop another $100 at least before people start buying again – that would be a drop of more than 30% from its 2011 peak and mean half the gains made in the gold price since the economy fell apart in 2008 would be lost.
Saxo Bank senior manager Ole Hansen pointed to people who had invested in gold for the long term cashing out and hedge funds driving the price down by betting against it as the main drivers of the fall, a process he sees continuing for “the foreseeable future".
"Purely looking at the charts, support would now be at $1,300,” Hansen said.
Others see far bigger drops. “Between January1975 and September 1976, the price of gold in dollars fell by almost one-half,” BullionVault’s Ash pointed out. A repeat of that fall would see the price dive to around $1,000 an ounce.
Time to sell, sell, sell?
Of course, a fall to two-year lows doesn’t mean the reason to hold gold is invalidated.
“Momentum is turning increasingly negative on gold,” said Mouhammed Choukeir, chief investment officer at Kleinwort Benson. “However, we do not own gold in portfolios as a pure momentum play.
“We own gold because of its defensive characteristics in times of financial stress and because its sensitivity to inflation is better than most other asset classes.”
It’s a sentiment others agree with.
“Longer term the outlook for gold is more positive, particularly as it gets cheaper,” said Hargreaves Lansdown’s Adrian Lowcock. “The loose monetary policy of Japan, UK and US and huge amounts of Quantitative Easing are storing up problems for the future and are likely to weaken currencies, potentially driving up inflation.
“Gold provides an insurance against this and investors should be wary of selling their insurance policy just because it appears they didn’t need it in the past.”
[Source: Reuters]
