Gold Price Falls as Margins Hiked Again

GOLD PRICE NEWS – The gold price continued to fall Monday, plunging $44.25 to $1,615 per ounce.  Another hike in margins by the CME Group helped greased the skids of the current correction in the gold price.  Today’s decline comes on the back of the price of gold posting its worst week since 1983 as broad-based liquidation engulfed the precious metals space.  The spot price of gold tumbled $96.48 to $1,644.27 on Friday, bringing its weekly loss to 9.2%.  COMEX gold futures slid $101.90, or 5.9%, to $1,639.80 per ounce on Friday, marking the third largest single-day nominal decline ever.  With today’s drop, the gold price is now 15.6% below its $1,922.20 all-time high, reached less than three weeks ago on September 6.

TD Securities highlighted the 200-day moving average as support, noting, “After the CME again increased margins on Friday night after the close for gold and silver we saw further liquidation in Asia overnight. Today’s chart is worth a look and re-iterates a level we highlighted some 2 weeks ago. The 200-day moving average for spot gold comes in around $1,529. This moving average has held very well for 2 years now and should we see it trade down there this week it should present a great buying opportunity.”

While the gold price endured a particularly challenging week, it paled in comparison to that of silver.  Gold’s sister precious metal plummeted 24.0% last week, and COMEX silver futures dropped 17.7% to $30.10 per ounce on Friday.  In doing so, silver posted its worst single-day performance since at least 1984, according to FactSet Research.  Silver also erased its entire year-to-date gain and is now lower by 2.7% in 2011 – while the gold price remains higher by 15.7%.

Gold equities fell victim to the gold price sell-off as the AMEX Gold Bugs Index (HUI) retreated 4.9% to 536.38 on Friday.  For the week, the HUI dropped 10.3% and returned to negative territory in 2011 – by 6.4%.  Barrick Gold (ABX) and Goldcorp (GG), the world’s two largest gold companies, posted weekly losses of 13.4% and 11.4%, respectively.  Small- and mid-cap gold stocks suffered even larger declines, as the Market Vectors Junior Gold Miners ETF (GDXJ) declined 13.4%.  Gold mining stocks moved lower Monday morning on the back of lower gold prices.

Although the broader U.S. equity markets rebounded modestly on Friday, they still posted steep declines last week.  European sovereign debt worries, coupled with disappointment from the Federal Reserve’s launch of Operation Twist, helped fuel the sell-off.  Cyclical commodities came under heavy selling pressure as well, with copper falling to $3.31 per pound and oil sliding to $80.11 per barrel.  Two of the only asset classes that moved higher were U.S. Treasuries and the U.S. dollar – as investors raised cash by selling dollar-denominated asset classes.

David McAlvany, President and CEO of McAlvany Financial Group, provided his thoughts on last week’s market action in a Bloomberg interview.  “To some degree you see the market responding as if this is a liquidity issue – movement into dollars, movement into Treasuries,” he noted.  “That’s fairly knee jerk at this point.”

“I think solvency is the greater issue,” McAlvany contended.  “We’re seeing that in Europe.  If anyone was checking the U.S. balance sheet, we’re really in a similar position.  And so the fact that people are moving to Treasuries and supporting one of the greatest bubbles of all-time is a little surprising.  We would expect a greater maturity in the market at this point.”

McAlvany’s longer-term bearish stance on the U.S. dollar contrasted with his bullish stance on the commodities complex.  He predicted that central banks across the globe will continue to engage in policies that debase their currencies in efforts to stimulate economic growth.  As a result, he stated that “I think commodities do have a good long-term play,” but also acknowledged that “certainly as long as there is these liquidity concerns in the market you’ll see a liquidation of most of your industrials and ags.”

Going forward, he asserted that “The real differentiation will be with the precious metals, gold in particular, even more than the white metals, as something that has no counterparty risk.”  When subsequently asked what his gold price outlook is, McAlvany responded that “I think this year still would not surprise me to see the year finish above $2,000 an ounce.  And beyond that $2,500, $3,000, on its way to 4 or 5 (thousand).”  McAlvany did not put a time frame on his $5,000 gold price call, however.

“I think the issue is not so much the price of gold but the value of the currencies that it’s priced in,” McAlvany added.  “And as they continue to compete on the downside, you’ll see the price of gold appreciating.  In fact that’s why I think on a longer-term basis you have a strong argument for commodities in general beyond the supply and demand constraints that you’ll face on a week-in week-out basis.  I think you’ll see them all repriced as we have sort of a beggar thy neighbor policy in place in the currency realm.

Based on his bullish gold price outlook, McAlvany was asked if precious metal mining companies would be “of interest to you.”  Although he did not discuss specific gold and silver stocks, McAlvany responded that “It would be, it would indeed.”