Looks Like the Gold Bears Were Right

The spot gold price hit an intraday low of $1,493.35 (£972.40) per troy ounce on Friday, putting it 22.3 percent below September 2011’s intraday peak of $1,921.41, according to a Telegraph article.

As a bear market is said to be a 20-percent fall from its high, gold can be said to be a bear market, even when prices subsequently recovered to $1,505.20 later in the day they are still 21.7 percent below the peak.

Over the weekend, the slump has continued, with the Sydney Morning Herald reporting this morning that spot gold dropped as much as 3.9 percent to $1,425.75 an ounce today and was at $1,433.15 in Singapore.

gold price
Source: telegraph.co.uk

Gold appears to have been hit by three factors. Firstly, the US dollar is stronger on speculation that the Federal Reserve could end quantitative easing by 2014, and secondly, adverse comments by analysts, particularly Goldman Sachs, advised clients last week to short gold, lowering its 12-month forecast to $1,390 from $1,550, according the Telegraph.

But thirdly – and maybe the primary catalyst for the fall – the ECB has agreed, indeed encouraged, Cyprus to sell its gold reserves to help fund the island’s bailout.

Cyprus holds 13.9 metric tons of gold, in itself not usually a market moving quantity, but if Cyprus is forced to sell the family silver to pay its way, the markets are speculating, “who next”?

Portugal holds 382.5 tons of gold, worth some €14.76bn ($19.1bn) at current prices, in its reserves, while Spain’s holdings stand at 281.6 tons, worth €10.8bn ($14bn). Both pale in significance to Italy, which is in political deadlock over the debt crisis and hasn’t had a government for three months. Italy is the world’s fourth-largest gold holder, with 2,451.8 tons of gold in its reserves, worth €94.6bn ($123bn).

Large-scale sales by any of these three would have a major impact on gold supply, but the prospect of what could happen with Italy is what frightens the market.

Gold, Silver ETF Trends

Nor has it just been the spot price that has seen falls: gold and silver ETFs have seen a sharp outflow of funds with SPDR Gold Trust, the world’s largest gold-backed exchange traded fund, losing nearly 20 tons late last week.

The silver price has followed gold down, although not as sharply.

All eyes will be on the market this week to see not if, but when, Goldman’s forecast of $1,390 is breached.

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