2011-09-27

Gold is a victim of its own success as liquidity trumps

Gold price continued to fall Tuesday, plunging $34.25 to $1,625 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.

In light of yesterday sell-off in gold, coupled with last week’s substantial decline, UBS analyst Edel Tully explained her reasoning for the yellow metal’s weakness in a note to clients.

“Gold is one of the few assets that remains in positive territory this year, in a sense it is one of the last assets standing, and because of this as investors head for cash they sell the assets that have performed,” Tully wrote.

“Essentially gold is a victim of its own success as liquidity trumps.”

Nic Brown, a commodities strategist at Natixis, provided his thoughts as well this morning on the move lower in the gold price. ”The rise in volatility taking place in the gold price was clearly an indication that gold was no longer a low-risk asset,” he wrote. “So there are a few signs there that would have given you pause for thought, but inevitably when the move happens, everyone is taken a little bit by surprise.”

Brown went on to say that “I would suggest that part of what is happening is a collective move away from commodities by investors. The fact that there is carnage going on across the commodities spectrum indicates there are a fair few investors who are getting cold feet at this stage and that has hit some precious metals disproportionately.”

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