Gold's price drop temporary, long-term outlook firm: analysts

In the latest gold news, gold prices dropped on Wednesday after comments given by Ben Bernanke. Many long term investors look at the price drop as a buying opportunity and the best time to buy coins. While gold remains volatile in the short-term, it remains very positive in the long term and the drop in prices will only be temporary.

Andy Blamey
March 1, 2012
Platts

Gold's price slump on Wednesday, which saw around $100 wiped off the price at one point during New York trading, was partly but not entirely attributable to comments by US Federal Reserve head Ben Bernanke, analysts said Thursday, adding that the drop in price could present a buying opportunity.

"Much has been placed on the testimony by Fed Head Bernanke but other markets saw less impact, leading to suggestions that it simply provided an excuse for a particular 'non US' fund to bail and take profits in dramatic fashion," said brokerage Sharps Pixley in market comment.

Gold for April delivery on COMEX plummeted $77.10 on the day to settle at $1,711.30/oz after Bernanke, in testimony before the US Congress, "quashed expectations of a further round of quantitative easing and gave a positive appraisal of the US labour market," Commerzbank noted in its daily commodities report.

The price was hammered lower by a reported 31-mt sell order on the US futures market, Sharps Pixley said, adding: "It may be possible that the seller had hoped the 1,000 lot sell order would trigger stops and thereby exaggerate the move lower, allowing the buying to potentially come back in at a much lower price."

The gold market had, however, been looking "fragile" for some time, according to Caroline Bain, commodities analyst at the Economist Intelligence Unit.

"All of the sharp drop in gold prices cannot be attributed to a lower likelihood of a new round of quantitative easing in the US," she said, though she added that this was "definitely a negative factor for gold as it will mean that there will not be a renewed surge in liquidity, some of which would find its way into the gold market." Gold has seen limited buying interest in recent weeks, particularly in China and India, Bain said.

"High prices were probably one factor deterring buyers but there was perhaps also an easing of concerns about an EU break up or disorderly default, which has lessened gold's attraction as a safe haven," she added.

Wednesday's sharp drop in prices "makes it quite clear that the previous rise in prices had been driven mainly by speculation," Commerzbank said.

Nevertheless, the bank added, longer-term investors have viewed on the price drop as a buying opportunity: "ETF investors with more of a long-term horizon ... seized the opportunity and bought strongly: the world's biggest gold ETF, the SPDR Gold Trust, recorded inflows yesterday of 9 mt."

The long term gold story remains unchanged, Sharps Pixley said.

"It is largely unreadable and volatile in the very short term, driven as it is by fast-moving news, political actions, policy decisions and economic events that are almost impossible to predict," the company said.

"However, it remains very positive for longer-term investors (particularly pension funds) with very positive fundamentals (the market is supply constrained and demand remains robust) and the broad macroeconomic issues remain unchanged," it added.

The drop in prices looks likely to be temporary, Commerzbank concluded: "We do not regard the price slump as sustainable and anticipate that the upswing will recommence soon." Gold reached a morning fix in London at $1,721/oz Thursday, down $49 from Wednesday's afternoon fix.

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