Gold Crashes On Fears Of Cyprus Sales: Time To Buy?
The bears pounded the gold bugs to a pulp Friday. Gold prices cratered to a 15-month low on fears Cyprus and other indebted European countries will be forced to sell their gold reserves to cover their bailouts.
Spot gold prices plummeted 4.79% to $1,487 an ounce -- the lowest level since July 2011. The yellow metal has tumbled 23% from its all-time high of $1,924 an ounce, officially signaling a bear market.
"It broke below key chart support at $1,525 an ounce, and we could see a measured move down to $1,250 an ounce during the next year or two," Mark Arbeter, chief technical strategist at S&P Capital IQ, wrote in his weekly report.
SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, crashed 4.72% to 143.92 in five times normal trade.Market Vectors Gold Miners ETF ( GDX ) collapsed 5.88% to 32.17 -- a four-year low -- in double average volume.
Traders blamed overreaction to news and automatic selling that was triggered when prices broke below key support at the September 2011 lows. Western central bank agreements limit annual gold sales to 400 tons a year and 2,000 tons over five years.
Lower prices would likely spur buying by South Korea and Brazil, said KC Chang, a Toronto-based senior economist at IHS. They only have 1.7% and 1.0% of monetary reserves, respectively, stored in the yellow metal. He believes prices will rebound in the next month or so.
Central Banks Hesitant
Central banks would be reluctant to sell in the face of falling prices and in such significant amounts that would drive prices lower, says Bill Witherell, chief global economist at Sarasota, Fla.-based Cumberland Advisors with $2.2 billion in assets under management.
"Central banks cannot afford the gold price to move lower," Miguel Perez-Santalla, vice president of business development at BullionVault, a precious metals exchange in New York, said in an email. "It devalues their holdings and makes their currency weaker. Gold sales, if done by central banks, will be done amongst themselves to avoid destruction in the marketplace."
Cyprus owns 13.9 tons of gold, amounting to nearly two-thirds of its monetary reserves, according to the World Gold Council. That's a speck compared with the European Central Bank's holdings of about 500 tons and the International Monetary Fund's 2,800 tons.
"The Cyprus news is not positive for gold, but the overall size of the gold sales is pretty minor, considering China continues to import upwards of 100 tons of gold a month through Hong Kong," Peter Spina, president of Littleton, Colo.-based GoldSeek.com, said in an email.
Demand remains strong overseas and Japanese investors are thrilled to own gold rather than the yen, Spina added. The island nation's currency has plunged 18% against the dollar in the past year.
PowerShares DB U.S. Dollar Index Bullish ( UUP ), tracking the greenback against a basket of major foreign currencies, slipped 0.13% to 22.34. It tends to trade opposite gold.
Its rally off its February lows could run out of steam soon from a contrarian perspective, says S&P Capital IQ's Arbeter. Trader sentiment has reached its most bullish level since July.
The Commitment of Traders ( COT ) data show commercial hedgers, the so-called smart money, are heavily short the dollar, while the speculators, or so-called dumb money, are the most bullish they've been in at least eight years, Arbeter wrote.
"Many times in the past, this combination of sentiment and COT data has led to decent-sized pullbacks," he said.
Overabundance Of Silver
Silver plunged 5.64% to 26.20 an ounce -- its lowest price since November 2010.IShares Silver Trust ( SLV ) gapped down 5.32% to 25.28 in 3-1/2 times average volume.Global X Silver Miners ETF (SIL) nose-dived 4.68% to 16.27 in triple usual trade.
Silver supplies have hit a 15-year high in Comex warehouses. Until industrial demand returns, silver prices will be linked to gold, ETF Securities' weekly precious metals report stated.