Gold prices and gold mining stocks collapsed Thursday as the
World Gold Council reported that global gold demand fell sharply
in the third quarter from the year-ago period because of global
weakness, high prices and slower demand from China.
Gold market watchers expect prices to fall much further before
finding a floor.
In midday trade, spot gold prices sank 0.69% to $1,716.60 an
ounce.SPDR Gold Shares (
), tracking a 10th of an ounce of bullion, fell 0.63% to 166.09.
PowerShares DB U.S.Dollar Index Bullish (
), measuring the dollar against a basket of global currencies,
was nearly flat at 22.20.
1. Global gold demand in the third quarter fell 14% year over
year to 1,084.6 tons, worth about $57.6 billion. However, demand
rose 10% over the second quarter.
2. Investment demand in Q3 dropped 16% from the year-ago
3. Global jewelry demand for gold fell 2%, while demand from
technology fell 6%, "reflecting global head winds and high
4. Demand from
shot up 56% to 136 tons.
5. Central banks continued to buy gold in Q3 -- 97.6 tons
worth $5.2 billion -- but at a slower pace and accounted for 9%
over overall demand.
6. Gold supply shrank 2% year over year.
Although the WGC's report was widely credited for Thursday's
price moves, some gold experts have little faith in its report,
which is based on surveys.
"The WGC-computed investment demand figure is entirely
irrelevant to gold demand and the price of gold," said Paul van
Eeden, president of Cranberry Capital, a private Canadian firm
that invests in explorers. The WGC's data don't add up to him
because the amount of gold that's actually traded daily as
tracked by the
London Bullion Market Association
far exceeds what the WGC computes on an annual basis.
"It doesn't make any sense," van Eeden said.
Supply And Demand Dynamics
So what's really driving supply and demand and thereby prices?
The gold bugs contend that gold prices are bound to rally as
central banks buy bullion to diversify their reserves. Central
banks' demand weakened as prices rose in the third quarter and
they'll likely start buying more when gold prices fall further,
says gold bull Peter Spina, president of GoldSeek.com in
"Central banks are not chasing the price higher. They are
likely to be more aggressive accumulators on pullbacks," said
Spina. "I believe that is one of the big supports under the
market and gives us a solid price floor at $1,600 (an
Secondly, the gold bugs scream central banks around the world
are printing money in their so-called quantitative easing
programs to support the economy. But such efforts at some point
are seen igniting inflation and sending gold prices soaring. So
far, U.S. inflation has been mild despite three rounds of
quantitative easing -- QE1, QE2 and QE3 -- which has boosted the
Federal Reserve's balance sheet to $2.8 trillion. The newly
printed money is just sitting on banks' books and isn't being
loaned out to consumers or corporations, which are already
"The U.S. is saturated with consumer and corporate debt," said
As a result, gold is very overpriced and the gold bulls are
buying for no reason, he said. Gold may be a safe haven or hedge
against inflation, but there isn't enough inflation to warrant
"Gold has already gone up a lot in price, so it is akin to
buying very expensive insurance," said Gerard Mihalick, a
portfolio manager at Wilkes Barre, Pa.-based Berkshire Asset
Management, with $700 million in assets under management. "In the
late 1970s early 1980s, gold actually declined nearly 70% in real
terms until it bottomed in the early 2000s.
"Investors who bought at the peak in the early 1980s are just
getting back to even in terms of purchasing power. Over a long
period of time, stocks have done a better job at generating real
returns than gold."
Gold Miners' Misfortune
Market Vectors Gold Miners ETF (
), a basket of large-cap global gold producers, fell 2.6% to
Market Vectors Junior Gold Miners ETF (
), a basket of small-cap global producers, plunged 4.2% to 21.15.
Both fell deeper below their 200-day moving averages, which is
Investors are most likely selling the gold miners stocks to
harvest tax losses, said Adrian Day, founder of Adrian Day Asset
Management in Annapolis, Md. "There has been lots of tax-loss
selling going on the last several weeks," Day said.
Gold miners will likely bottom at their lows from May 2012,
says David Morgan, publisher of The Morgan Report, which
specializes in gold.
"We think those lows will hold and if the gold stocks get into
that range it will be quite a buying opportunity," said
"Once the May lows are tested, we expect to see a divergence
where the gold stocks gain strength and trend upward (following
gold), while the general equity market continues to suffer
because of the constraints presented in the upcoming fiscal
revisions presently to take place at year-end."
A correction to the May lows would make for a 15% drop from
GDX's current price and an 18% drop for GDXJ.
Follow Trang Ho on Twitter @TrangHoETFs