Gold Prices Dip, S&P 500 Officially in Bear Market

GOLD PRICE NEWS – The gold price dipped Tuesday, sliding $8.30 to $1650.40 per ounce on the back of continued liquidation pressures in global financial markets.  The 0.5% drop in the price of gold occurred alongside broad-based weakness in commodities.  WTI crude oil led to the downside, dropping 2.6% to $75.58 per ounce while copper declined 1.5% to $3.10 per pound.

Worries over the prospect of a double-dip recession intensified this morning as the S&P 500 fell into bear market territory, dropping 20% off this year’s high.  The flight away from riskier assets such as equities continues to benefit U.S. Treasuries, evidenced by the 10-year yield falling to 1.63% early Tuesday.

On Monday, the gold price climbed $29.16, or 1.8%, to $1,653.28 per ounce as European sovereign debt concerns continued to dominate the financial landscape.  In contrast to recent weeks, the gold price held up particularly well in the face of broad-based liquidation on Wall Street.  While equities and cyclical commodities posted substantial losses, the gold price recaptured nearly its entire loss from last week.

Silver was one of the few assets to move higher yesterday alongside the gold price.  Silver advanced $0.32, or 1.1%, to $30.25 per ounce.  Precious metals equities were initially bolstered by the rise in gold and silver prices, but turned lower as the broader markets extended their losses.  The Philadelphia Gold & Silver Index (XAU) finished down 1.1% at 182.98, its lowest closing level since September 13, 2010.  Notable decliners included AngloGold Ashanti (AU) and Yamana Gold (AUY), which dropped 1.5% and 1.9%, respectively.  Gold mining stocks moved lower early Tuesday on softer gold prices.

Greece’s announcement that it will not meet its budget deficit targets helped send equity markets across Europe and the U.S. sharply lower yesterday.  The Dow Jones Industrial Average (DJIA) tumbled 258.08 points, or 2.4%, to a new 52-week low of 10.655.30.  The euro currency headed south as well, falling 1.1% to 1.3203 against the U.S. dollar, a level not seen since January 13 of this year.

Despite Monday’s rally, the spot price of gold remains 14.0% below its $1,922.20 all-time high.  Commenting on the gold price weakness, Dundee Securities chief economist Dr. Martin Murenbeeld wrote in a note to clients that “Gold typically declines when the major economies are in recession; it happened in 2008 and it happened in 1974-75 when the second-worst post WW-II recession hit.  Gold was in a major bull cycle in the 1970’s (a cycle which ended in the second half of 1980 when Fed Chairman Paul Volcker pushed interest rates to record highs).  But the 1974-75 recession caused gold to pull back 47% peak to trough, smack in the middle of that cycle.”

Murenbeeld went on to say that “We do not believe this cycle is finished for gold.  We do however think that gold will now require some help from European (and US policy) to move significantly higher again.”  As for specific policy measures, Murenbeeld predicted that there is an 80% chance Europe will “cobble together” a more robust set of measures to combat the sovereign debt crisis.

One alternative would involve levering up the European Financial Stability Fund (EFSF) in order to provide substantially more financial assistance to troubled euro zone nations and the European banking system.  Although he did not suggest a particular size, Murenbeeld noted that last week that the price of gold jumped amid rumors that the EFSF could be expanded to €2 trillion.  Given that such a move would inherently involve significant amounts of fiat money creation, Murenbeeld contended that the gold price would clearly be a prime beneficiary of such actions.