The price action from yesterday's early New York trading session was particularly dramatic when gold prices collapsed. The 5.6% drop in the price of the NYMEX gold futures contract sends a signal from the commodities market that additional stress is apparent the financial markets.
Since the beginning of July the price of gold has accelerated rapidly, rising from $1,500 to over $1,900 as of Tuesday morning. However, that all changed following the announcement that the Shanghai Gold Exchange would raise the margin requirements for gold forward contracts for the second time this month. This led to a decline to $1,823, a price below Monday's closing price. Technical analysts would note this as an outside day down candlestick, a powerful reversal signal. Wednesday's price action followed with a continuation of the move lower and the selling was intensified as the price dipped to a low of $1,741. Most of these losses came in the opening minutes of the New York trading session. As of Thursday morning the price of spot gold is testing the $1,700 level.
I will not dive into the argument if the price of gold is fairly valued or currently an asset bubble, but as FT Alphaville pointed out the GLD gold trust overtook the SPY (S&P 500) as the largest ETF by market value. Market positioning was also stretched to say the least with the CFTC Commitment of Traders report showed in early August the number of net long gold futures and options contracts in managed money reached 250,000.
Interestingly enough the dramatic drop in the price of gold occurred only days before what could be considered the most important event in financial markets this year, Ben Bernanke's Jackson Hole speech. The price action may be sending a signal that the financial markets expect further volatility to come in the near term.
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